Accepting collateral for a loan.

[Boomyal]

Just thought I would post this out of general interest. If you ever accept collateral against a loan you make, make sure you file a UCC (universal commercial code) notice with your particular state government. Also note that these UCC's have a life span of around 5 years so if your loan payback exceeds this, be sure to renew it timely.

My Wife's cousin recently put his corporation in to chapter 13 bankruptcy. His corporation owed my wife $8k, having pledged certain equipment as collateral. This was well documented in the loan agreement. Come the bankruptcy my Wife submits the loan agreement to the bankruptcy court, confident that her loan was secured.

WRONG! The original UCC had expired and the Court relegated her loan to the 'unsecured' list. They then went on to auction off all the equipment that had been pledged to her. It would have been akin to a lender holding the title on a financed vehicle.

In the end, the Trustees amassed about 150k from the liquidation of all the corporate assets. Absolutely NO creditors, of any class got a dime of it. All $150K went to the Trustees and their cronies. Had the UCC filing still been in force, my Wife would have gotten paid out of the proceeds for that specific equipment that was liquidated in the bankruptcy auction.

 

[Bayou Dave]

Re: Accepting collateral for a loan.

Good points and a hard lesson for your wife. Filing and renewing a UCC timely sure does make a difference whether the person if going bankrupt or tries to use the same equipment for collateral on a different loan.

 

[agallant80]

Re: Accepting collateral for a loan.

I have had family and friends approach me about helping them fund existing or new business. I have always said no because I see too many stories like this. Also off the table is business advice. I don't ever want anything coming back to me from friends or family. Sorry for your loss but on the bright side its only $8K. Its allot of money but its not like your hose was mortgaged to help a family business. You still have your health and your lovely wife.

 

[drrpm]

Re: Accepting collateral for a loan.

I made a loan to a friend who offered a kayak as security. The kayak went into my crawl space and came out when the debt was repaid. I would have made the loan without the kayak but it seemed to make her feel better about taking the loan to offer some security.

 

[Boomyal]

Re: Accepting collateral for a loan.

Good points and a hard lesson for your wife. Filing and renewing a UCC timely sure does make a difference whether the person if going bankrupt or tries to use the same equipment for collateral on a different loan.

Wife's cousin did that too. He did it with his own father but there was no UCC filed for that loan either. It was about 160K. Great cousin/son, huh?

 

[Boomyal]

Re: Accepting collateral for a loan.

I made a loan to a friend who offered a kayak as security. The kayak went into my crawl space and came out when the debt was repaid. I would have made the loan without the kayak but it seemed to make her feel better about taking the loan to offer some security.

The original note was for 200K so a remaining balance of 8k was not the end of the world, although not insignificant. It would have been a little bit difficult to put all the company's pledged operational equipment in our basement.

 

[agallant80]

Re: Accepting collateral for a loan.

Just wondering but what did his company do?

 

[Boomyal]

Re: Accepting collateral for a loan.

Just wondering but what did his company do?

Predominantly, agallant, they slit and re-rolled bulk sheet goods for the industry. My Wife was not involved in the business but she inherited a loan, made by her father to the cousin and she was a landlord partner as well.

In retrospect, it became apparent that the company was poorly managed and then met it's demise from both the recession and some embezzlement by the office manager.