The Advantages to Becoming a Secured Creditor vs Un-Secured

By: Wilson Cole
Date: 11/1/2007

In a past issue we talked about becoming a Secured Creditor. If you will take the next five minutes and read this article you will be amazed at how unfair things can be for the Un-Secured Creditor.

About three months ago, a client, who was an Un-Secured Creditor, requested our collection assistance on an account for $50,000. We immediately started the collection process on the account and with a little luck, and collection skills, we had the debtor sign an agreement that they would pay $5000 per week until the account was paid in full. Just like clock work the payments started to come in and we were a hero to the client. After six weeks the debtor missed a payment, so we contacted them again and reminded them of the agreement that they had made, and we received a check in the mail promptly. But the following week, they missed the payment again. We contacted the debtor and they avoided our calls; then we tried to contact their attorney, who also avoided our calls for about a week. Then, the phone call came that we in the collection industry dread, "Mr. Cole, This is Attorney Fred Smith, (not his real name) my client has just filed for Bankruptcy Protection."

(You may be thinking that at least they got about half of the balance that was owed to them, and they recovered some of the cost, but that is not necessarily so). I then      had to call my Client and share with them the news I had just been given. Needless to say they were disappointed. Then I also shared with them some information of which most companies are unaware. I explained that in a few months I was sure they were going to receive a phone call from the Bankruptcy Court, or the Attorney for the Secured Creditors, asking for the money that was paid to them in the last 90 days to be returned.

Our Client said, "Do you mean I got stiffed for half of the balance, and now I may have to return the money that I received within the last 90 days?" The truth is, "yes;" unfortunately they will have to give back all, or most, of the funds they received 90 days prior to the Debtor filing for Bankruptcy. As bizarre as that sounds, it happens to our clients about a dozen times a month.

The reason for this strange twist in American Justice is called "The Preferential Payment." It states, in plain English, that Secured Creditors get paid in accordance with where they stand in line with the Uniform Commercial Code-1 (UCC-1) Filing. A Secured Creditor gets paid first, and if anything is left over, then the Un-Secured Creditors get an equal percentage of the debt that is owed to them. If one Un-Secured creditor is owed $1,000 and another Un- Secured Creditor is owed $1,000 and there is only $100 left over then, once the Secured Creditors and the attorneys get paid, the Un-Secured Creditors would get $50 each.

If our client had been a Secured Creditor, the same thing could still have happened if another company had filed their UCC-1 Filing first and they wanted to contest the payments. But more then likely, our client would have been able to keep those funds uncontested.

What do I suggest if this happens to you? First, hire an attorney and do not ignore this. It will not go away. Sometimes the attorney can negotiate a lower amount that would have to be given back. Secondly, set it up on the front-side of the deal where this would be less likely. In addition, I am certain that you, and your staff, would benefit from some further education in Credit Management. Go to a Credit Management class at a local college. Sometimes we even teach the course at State Conferences. There are several collections companies, such as ours, that offer trainings on topics, such as Basic Credit Management, too. Our training is a "Drop-In Training System" for $499 with a money-back guarantee. Whether you decide to use our System, or our competitors, you need to be protected and you should have an educated system in place.

Wilson Cole is the President of Adams, Evens, & Ross Collections. He can be contacted at 800.452.5287, or by email at Wilson@aercollections. com, or visit www.aercollections.com.