Secured creditors use collateral to protect their investments. Collateral can be a good form of financial protection, but the security only exists if creditors follow all legal requirements. If all legal requirements are not met, a secured creditor might not have priority over other creditors – or have no legal rights to the collateral at all. An experienced securities lawyer can help your business protect its assets by securing your transactions appropriately.
There are many ways that a creditor can gain priority over other creditors. Mortgage lenders, for example, file specific legal documents along with the recorded deed to ensure that they have a secured interest in the home if the borrower stops making required mortgage payments. These documents are made publicly available by the county recorder. As a result, the mortgage lender is able to claim priority over other claimants to the home and even secure priority in any bankruptcy proceedings the borrower might file.
The same principles apply to businesses that have a secured interest in collateral to protect their investments. Documents are drafted to conform to the Uniform Commercial Code. These “UCC filings” are then sent to the office of the Secretary of State to be recorded. These public records serve as notice to other creditors. Like a mortgage recorded at the county recorder’s office, the security is protected because other creditors have been notified that the secured creditor has priority.