The Importance of Filing Your PMSI Timely: When is a Purchase Money Security Interest (PMSI) Perfected?
A PMSI is considered fully perfected once you:
- have the debtor sign and date the security agreement/credit application
- verify the debtor’s correct legal name and state of jurisdiction through the articles of incorporation or driver’s license
- file the Financing Statement
- complete a UCC-11 search in the state of jurisdiction and all states to which the secured party is shipping
- notify all previous secured parties
The typical perfection process time can take 3 to 4 weeks.
Why Would a PMSI Perfection Be Delayed?
There are many factors that can cause the delay of a security interest’s perfection. Factors such as:
- if the state of jurisdiction does not offer online filing (i.e. the jurisdiction only accepts entries via fax or mail)
- if the filing includes an attachment, such as an additional collateral description, and the state does not permit the online filing of attachments
- if the UCC search website is not through the security interest filing date (i.e. today is 04/01/2015, but the state has only filed records through 02/01/2015)
- if several previous secured parties need to be notified and there is a delay in verifying receipt of the notification letters or if those parties are located in a different country
The Date of Perfection
Once a PMSI is fully perfected, your collateral will be secured as of the date of the filing or the date the agreement was signed, whichever is later.
Example of Perfection
Any inventory that the debtor takes possession of before the date of perfection may not be protected by the filing. This is because you are not considered a secured creditor until perfection which is achieved by completing the steps listed above.
For example, you and your customer signed a security agreement. Some time passes; now your customer has an outstanding balance of $100,000.00 and you decide to file a PMSI. Because you filed a PMSI and followed all the steps for perfection, you believe you are now a secured creditor, so you extend an additional $50,000.00 to your customer. Unfortunately, you are only considered secured for the $50,000.00 your customer acquired after the PMSI was perfected, leaving the $100,000.00 unsecured.
Had you, the creditor, filed the PMSI when the original $100,000.00 agreement was signed, the full amount ($150,000.00) would be considered secured by the Purchase Money Security Interest filing.
Don’t Get Hit By Preference
Another important reason to file a PMSI as soon as you receive the signed security agreement/credit application is to proactively protect yourself, in the event your customer files for bankruptcy protection.
Let’s say you discover your customer is intending to file bankruptcy in the next month and you are not a secured party. Unfortunately, it’s too late to file the PMSI as security because there is a 90 day preference period regarding all security interest filings and bankruptcy. Any security interest filed within 90 days of the bankruptcy being filed will be dismissed as a preference and not considered as part of the bankruptcy proceedings, leaving you as an unsecured party.
Always file your PMSI at the time the security agreement is executed! Remember the UCC has no impact on your customer’s credit or day to day operations. Only impact is if they file bankruptcy then you are a secured party.