Protecting Your Right to Get Paid Vol. 1: Security Interests

When you sell an aircraft part on credit, you want to make sure you will eventually get paid.  There are a variety of factors that can impede your payment.  This post offers one strategy for increasing the potential to get paid in adverse conditions (through security interests).

If you offer terms, then you are typically offering credit!  Offering credit to a customer is a normal business practice but it creates a risk of non-payment. 

In the most extreme situations, customers can find themselves seeking bankruptcy protection and this can result in their debts to you being reduced or even wiped out, depending on the nature of the proceedings. 

One way to increase your right to get paid is to establish a security interest in the article that is being sold.  One of the advantages of a security interest is if the debtor files for bankruptcy protection, then a security interest changes your payment recovery for the outstanding debts.  Security interests are given a “priority” in bankruptcy.  Typically, when there is a liquidation, certain priorities get paid (in the appropriate order) before unsecured debts.  With a security interest, the securing asset’s value will be applied to the debt. 

For example, let’s say you sell an aircraft asset to a customer for $1,000,000.  You secure the debt with a properly-perfected security interest.  The customer owes the entire purchase price on 90 day credit terms; but before the customer pays, the customer files a bankruptcy petition.

The bankruptcy trustee ultimately sells that asset at auction.  In scenario one, the unit fetches a price of $700,000.  That entire value is assigned to satisfy the security interest.  Which means that you get paid $700,000, and have a remaining unsecured debt of $300,000 (the unpaid balance).  You will get paid with the rest of the unsecured creditors, which might mean pennies on the dollar or it might mean nothing.   While $700,000 might be disappointing, it is a lot better than nothing. 

In scenario two, the unit fetches a price of $1,200,000.  That value is sufficient to fully satisfy the security interest.  Which means that you get paid the $1,000,000 that you are owed and the remaining proceeds of $200,000 will go into the bankruptcy estate (or pay any secondary liens).

Note that there are special bankruptcy rules that apply to certain aircraft and aircraft parts (and can allow for recovery of the complete asset). E.g. 11 U.S.C. § 1110.

You don’t have to wait for a bankruptcy to make use of your security interest. You can also foreclose your security interest upon a default in payment (specific procedures may depend on the language of your security agreement as well as applicable state law).

In my next post I will cover typical mechanisms for filing and perfecting security interests when selling aircraft parts.