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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Legal
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Experience:  JA Mentor -Attorney Labor/employment, corporate, sports law, admiralty/maritime and civil rights law
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Hi, Im back with another legal question re. my civil claim

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Hi,

I'm back with another legal question re. my civil claim against a local food co-op that I filed to collect a loan. I am in negotiations with their attorney to refinance the loan with stated monthly payments. I asked for a lien on the personal property and inventory of the business, which their atty. agreed to do. However, this would put me in the second position as there is an existing lien on these items. The atty. stated that even though I would not have any rights to repossession of the property in this position, the lien would put me in better standing above other unsecured lenders. Is this all correct information? If not, which is correct and incorrect? I need to plan my best course of action at this point and would like to have this resolved prior to a scheduled May 1st arbitration hearing.
Thank you for your question. I look forward to working with you to provide you the information you are seeking.

The attorney is correct in the fact you would become a secured creditor which means in the event of bankruptcy you would be in the first list of people to get paid before secured creditors. Unfortunately, as they have existing liens in place, you do have to stand in line behind the first creditor, which means it is not likely you will collect even though you have a lien in the case of default or bankruptcy, this first creditor has the right to collect first and if there is nothing left once they collect, even if you have a lien you get nothing.

Thus, these second liens are often meaningless unless the first liens are for much less than the value of the property that they are securing. For example, if the value of the property is $100K and the first liens are only for $50K, then you have a chance to get your money back or some amount back out of the remaining $50K. However, if the property is worth $100K and the first liens are $90K or whatever, your chance of getting anything are slim to none (I'm sure you get the picture, the more the first loan is worth, the less chance you have of getting anything even with a second lien).




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Customer: replied 3 years ago.

Thank you for your answer. I have a follow-up question: What can I do to ensure that the payments will be made on time without the ability to repossess the security?

Thank you for your follow up.

This is the billion dollar question for most creditors. You can put in penalty clauses for late payments, such as a reasonable late fee based on the amount of the payment due (in other words, a late penalty of $50 on a $100 payment may be excessive, where a $25 late fee on a $100 payment would not) together with adding in an acceleration clause which allows you to demand payment in full if they are delinquent and to sue for the full balance if they fail to pay and include an attorney's fees clause to make them pay your fees and costs if you have to sue. However, all of these things are only as good as the solvency of the company and their ability to pay and if your collection effort means they cannot pay and they file bankruptcy, then you would likely still not be able to collect.

The only other thing you could do is ask them to take out a bond to insure payment (which they may not get if they are not financially stable).
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Customer: replied 3 years ago.

Thank you. A bond as from an insurance company?

Thank you for your response.

Yes a bond from an insurance company.
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