UCC, Bankruptcy, and Secured Lines of Credit

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Question:

If I have a matured line of credit secured by a UCC filing on inventory and accounts receivable and my customer files bankruptcy, assuming my collateral is now under the jurisdiction of the court, is my collateral protected? If not, is there anything I can do to protect it?

Answer:

If you have properly perfected your security interest and you are in the first priority position, your collateral most likely will be protected. You should receive a Proof of Claim to file with the Bankruptcy Court and you may be contacted by the Trustee. Your collateral will not be automatically turned over to you. You may be required to file motion with the Court to obtain a release. If you are not very familiar with bankruptcy proceedings or if the value of your collateral is significant, I strongly suggest you contact an attorney who handles bankruptcy claims for secured parties. In addition if the inventory collateral is of a type that is perishable or subject to reduction in value if not properly handled, there may be immediate actions that need to be taken to protect your rights and the value of your collateral.

First published on BankersOnline.com 2/11/02