Over Pledged Collateral (PMSI & NPMSI)

Often during the course of a Chapter 7 or Chapter 13 bankruptcy filing it becomes apparent to the attorney either through interviewing the client or while conducting electronic UCC searches with the Secretary of State’s office the same collateral has been pledged to several secured creditors. Often time the collateral pledged is not entirely worth the value of the loan amount. Sometimes the creditor will overstate the value of the collateral to make the loan. Whether or not the debtor is unwittingly complicit in this process is a hard to determine from the facts. Before determining which creditor has the superior lien (first UCC filing on the collateral) I want to know if the creditor helped purchase the collateral and they have a purchase money security interest or if it is something else such as a non purchase money security interest. Sometimes the collateral started out as purchase money security interest yet became a non purchase money through the creditors actions . Again this is a fact driven issue. If it is a strait purchase money security interest, the debtor is either going to have to pay for this debt, surrender or negotiate some other value and repayment. If the debt is non purchase money security interest, I often recommend my clients abandon the collateral after analyzing if its value if disproportionate to the debt (undervalued). A three hundred dollars television is not worth a $1,500.00 loan repayment. Unless their is a family heirloom or something with tremendous sentimental value it may be best to surrender the collateral. I use this analysis process in a Chapter 7 and Chapter 13. Nevertheless in a Chapter 13 we can often lower the interest rate to five per cent (.05% vice the 39% that many creditors ( Loan Companies) charge.