In March, Margaret made a loan to Pete for $10,000.Three months later, she began to hear rumors about Pete's failing financial condition.When in late July, Pete asked her to loan him an additional $2,000 to buy inventory, Margaret required a security interest in the inventory and also demanded that Pete secure the first loan with his personal automobile.In September, Pete filed bankruptcy.Will these security interests stand up?

Question

Quizplus · Accepted Answer

Security interests created just before the debtor files for bankruptcy may be set aside as voidable preferences. The security interest in the automobile would be considered a voidable preference since it was created within 90 days before Pete filed for bankruptcy. The security interest in the inventory may stand if it was properly filed and meets other requirements, but it may still be challenged as a preference if it was granted when Pete was insolvent or within 90 days of the bankruptcy filing. The fact that the loan was for an antecedent debt does not guarantee that the security interest will stand up to a preference challenge.

In March, Margaret Made a Loan to Pete for $10,000