It starts with you lending money to a person you think of as a friend -- or at least someone you trust -- or a company that you think will be able to pay you back. Then, after some time goes by, that person or company does NOT pay you back. What are your rights?

A good lawyer asks that question before you lend the money. A more important question to be asked and answered is "what are the client's rights if that person (the debtor) files bankruptcy?". Other questions, of course, may include whether the money will be invested or loaned to purchase real estate, as start-up capital in a new business venture or just as a personal loan. Most importantly, however, prior to any such transaction, the lawyer should advise the client about the consequences of bankruptcy of the other person.

Even if the transaction is not a real estate transaction, the lawyer should conduct title, credit and background searches primarily to determine what and how many judgments against that person or business and how many liens (mortgages and judgments) are on the real estate. Would you invest in a person's real estate venture or a business venture if you knew that there were several hundred thousand dollars in judgments against that person or his or her property or business? Would your answer change if they said that the loan was for a different purpose? Probably not and understandably so.

What if existing creditors would subordinate their liens to yours, which means that you become first in right to the proceeds on sale? Subordination, however, is relatively uncommon. But even if you are able to get into senior-most lien position (first in line to be paid from sale), those other debts still need to be paid somehow if the property isn't sold. And, even if you're able to get into the senior-most lien position, it is not a guaranty that you will recover your investment or loan in a bankruptcy.

As you might suspect, there is historically and statistically a greater likelihood of bankruptcy in an ailing economy or industry. A good lawyer needs to be familiar with bankruptcy even in good economic times because we cannot really ascertain when an industry or business that is performing well or expected to perform well may decline as a result of a macro-economic recession or otherwise. The risk of loss on a loan or investment becomes realized as soon as additional cost and time is spent trying to recover the loan or investment.

A good lawyer will advise the client how to minimize risk. Filing proper mortgages are critical to secure real estate as collateral for a loan. In fact, there is no other way to fully secure a loan other than a mortgage. If a mortgage is not filed, then the real estate is exposed to the ability for other creditors to secure the real estate as collateral prior to the client. Without properly filing a mortgage, the client would have to obtain a judgment against the debtor, which must result from a lawsuit or confession (voluntary) but which may take a while and perhaps too long to obtain to ensure any security at all. Although personal guarantees, security agreements and financing statements are essential in providing at least some security upon collateral other than real estate, nothing provides more security on real estate than a mortgage. It is also important to note that a mortgage can be filed to secure real estate as collateral for a loan that has nothing to do with the real estate. The trick is to negotiate the transaction so that loan is not made unless the debtor agrees to permit the filing of a mortgage on the debtor's real estate even though the loan may not have been made to purchase the real estate or make improvements on it.

In a bankruptcy or foreclosure, however, a mortgage cannot guaranty complete security because it is possible that the real estate could sell for less than the amount of the loan, in which case, the mortgagee (creditor) must consider whether it chooses to write off the amount (a short sale) or pursue the debtor for the excess of the loan over the amount recovered from the sale. And, what if no one buys the real estate? Well, that's when the security and/or possession of other collateral should come in handy. There's much lawyer can do and a good lawyer makes sure to advise that clients should, like a bank, accept nothing less than the best way to minimize risk by conducting title searches and filing mortgages and financing statements.