A secured transaction ensues when an individual or business borrows money to buy real estate, automobiles, or commercial equipment. A security interest is created as soon as a borrower signs a contract allowing the lender, or secured party, to seize assets the borrower possesses if the borrower defaults on the loan. The terms “security interest” and “lien” are often used interchangeably in the US.
A creditor’s contractual claim to property or assets to fulfill or safeguard a debt obligation is known as a security interest. Secured transactions are ruled by Article 9 of the Uniform Commercial Code (“UCC”).
Creditors can get security interests in the following items under the UCC:
- personal possessions
- estate fixtures,
- chattel paper,
- compensation intangibles,
- promissory notes,
- leases (including an option to buy a leased good, also called a Purchase Money Security Interest).
Secured transactions have a specific purpose.
A security interest fosters financial stability by guaranteeing payback to the lender. If the borrower fails to repay, the lender should be able to recover the loan amount by disposing of the agreed-upon item used as collateral.
Secured creditors will be able to retrieve their debts before regular creditors without a security interest, which makes a security interest particularly beneficial in bankruptcies. In case of a delay or any other issue, a secured transactions lawyer can help you recover your debt fast and hassle-free.
Secured transactions are governed by what laws?
A security interest is usually created through a security agreement- a contract governed by the Uniform Commercial Code (UCC) Article 9 and various state contract laws. Every state, as well as the District of Columbia, Guam, and the US Virgin Islands, has accepted the UCC with minor amendments.
Article 9 of the UCC controls any voluntary and business transaction that produces a private property interest. Fixtures, which are private possessions tied to real property, such as a furnace, are examples of personal property.
Purchase Money Security Interest
Purchase Money Security Interests, often known as “conditioned sales,” are a type of purchase money security interest. These are typically point-of-sale financing arrangements in which the seller finances the transaction and the purchaser repays the loan over time. The seller reclaims the property if the buyer defaults. After the buyer has paid in full, the title is transferred to him. A seller with a purchase money security interest is prohibited from charging a fee for exercising a purchase option provided the fee is low, i.e., a “no-brainer” expense.
If a secured creditor/lessor charges extra from the debtor for the buy option, the creditor’s security interest in the transaction could be forfeited. Overcharging may result in a lease transaction instead of a purchase money security interest. In this case, overcharging means demanding a price equivalent to or higher than “the fairly predictable legitimate market worth of the products when the choice is to be executed.” 1-203 at UCC. In practice, however, anything more than a “nominal” or “no-brainer” price may jeopardize the security interest.
A USD 350 couch layaway transaction, for example, could be considered a purchase money security interest for the finance creditor. The creditor’s security interest would be eliminated if the creditor imposed a USD 300 stocking fee in the purchase option. A standard stocking fee would keep the interest flowing. In Purchase Money Security Interest transactions, creditors should get legal advice to protect their security interests.
How to create an enforceable security interest?
An enforceable security interest “connects” to collateral, putting it at risk in the event of a debt default. If the debtor defaults on repayment, a creditor may be able to seize collateral rights. The security interest is not binding if an agreement postpones the moment of attachment. When a debtor and a creditor join into a security agreement, a security interest is usually created there and then. Unless a creditor submits a UCC financing statement (sometimes known as “perfecting” its interest in the security), its rights may not be fully enforceable against other creditors.
For a security interest to be legitimate, creditors must fulfill certain requirements. A secured creditor must first assign a value to a debtor. Second, a debtor must have valid collateral ownership or the ability to transfer collateral rights. The debtor cannot lawfully transfer rights to the secured creditor without this. Third, the debtor should “verify” a security agreement that defines the collateral or provides the secured creditor ownership over relevant assets (for example, by signing it- for example, deposit account funds, electronic chattel paper, investment property, letters of credit rights, etc.). If a security agreement does not exist, the secured party should claim ownership of the collateral.
As you can see, there are so many intricacies involved it becomes imperative to hire a secured transactions lawyer for smooth processing and avoid legal hassles.
Enforcing Security Interest Legally
Creditors can pursue their security interests when debtors fail to meet their obligations under the security agreement. “Default” is not defined in the UCC. In most cases, the security agreement specifies what constitutes a default in a particular transaction.
If a debtor defaults, a creditor has the right to seize the collateral covered by the defaulted security arrangement as long as it doesn’t “breach the peace.” A creditor, for example, could pull an automobile from the debtor’s driveway if approved, but the creditor is unlikely to break into the debtor’s garage to take away the vehicle. That’s why you need a secured transactions lawyer to get things done swiftly and lawfully.
Secured transactions might be simple or quite complicated. When debtors and creditors sign into secured contracts, creditors get security interests, the perfection of claims, sale of collateral, or post-sale litigation, legal complications may develop. Debtors and creditors should get professional counsel from a secured transactions lawyer on their rights and obligations addressing these secured transaction risks. To schedule a free and private consultation, contact our competent and knowledgable asset recovery attorneys now by visiting www.bblawpllc.com or email <xyz>@bblawpllc.com.