Securing Property for Bad Debt

In certain situations where a debtor has defaulted or is extremely delinquent, the lender may decide to try and secure the bad debt by seizing the property of the debtor. In the case of a debtor who has defaulted on an auto loan, the lender may decide to repossess the car, thereby securing the property for the bad debt. The purpose of securing the property of the debtor is to protect the lender from suffering a total loss on the loan, to the extent that such protection is possible.

Can Real Estate become Secured Property for Bad Debt?

If the property that a business is seeking to secure for a bad debt is real property (i.e. real estate), the business (i.e. the lender) would file a property lien to secure the real property of the debtor. A property lien acts as a form of collateral, providing protection to the creditor when all other options have proven ineffective for recovering the debt from the borrower.

Can a Car become Secured Property for Bad Debt?

In order to secure a bad debt, personal property may be used as collateral by the lender. Personal property is essentially anything that is not real property. The primary example commonly used to explain personal property is a car. A lender, subject to the specific rules of the jurisdiction in which the borrower lives, may be able to secure the car as collateral for the amount of the unpaid loan. In the event that the car is worth more than the outstanding loan amount, the lender would have to refund the difference to the borrower.

How is Property Seized & Secured?

As a general rule, it is always a good idea for businesses to secure collateral prior to borrower default. Property can be secured at the outset by obtaining a contractual lien or a Purchase Money Security Interest ("PMSI") in the items purchased with the funds obtained from the lender. If the business does not secure property before default, they may secure property after default by obtaining a statutory of judgment lien.

The End Result

While the best option is to find a way to negotiate workable terms with a borrower, a lender may end up in a position where the borrower is unable or unwilling to cooperate. In situations like these, securing property as collateral for the bad debt may be the only way for the lender to ensure that they receive some amount of payment. The end result of successfully securing property for a bad debt is that lender will likely receive more money than they would have had the property not been secured.

Getting Legal Help

If successful, securing property for a bad debt is a strong option for businesses who are dealing with delinquent borrowers. When attempting to secure property by a lien or repossession, there are many different rules and regulations within each state that must be adhered to. In order to ensure compliance with the laws, and to have the best chance of securing the target property, businesses should seek legal advice and representation from an experienced attorney who frequently deals with real and personal property issues.