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Enforcing Security Interests

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What Is a Security Interest?

A security interest is an interest in property that secures the performance of an obligation by one party to another, such as the payment of a debt.

Security interests can be granted in nearly any type of property, including presently owned or even after-acquired property.

How to Create a Security Interest

A security interest is usually created by a written agreement. The agreement generally requires:

  1. Explicit language: Words expressly granting or creating the interest.
  2. Authentication: The party granting the interest must authenticate the agreement, usually by signing.
  3. Description of the Collateral: The agreement must describe the collateral, either by specifically identifying it, describing its category, or otherwise reasonably identifying it. Whether a description is sufficient depends in part on the type of collateral being encumbered. The statement, “all the debtor’s property,” is usually not sufficient.

Making Security Interests Enforceable

A security interest is enforceable when it "attaches" to the collateral. Attachment occurs when:

  • Value has been given for the security interest.
  • The debtor has rights in the property.
  • There is evidence that the debtor intended to create a security interest.

How to Enforce the Security Agreement

If the debtor defaults, the secured creditor may:

  • Take possession of the collateral and sell it.
  • Take possession of the collateral and sell it, then sue for a deficiency judgment.
  • Ignore the security interest seek a judgment against the debtor.
  • Use other remedies stated in the security agreement or provided by statute.
  • If the collateral is taken and sold, the secured creditor must return any surplus from the sale to the debtor.

What about Third Parties?

Third parties may have an interest in the collateral. If so, "perfection" determines the secured creditor’s rights with respect to third parties.

How to Perfect a Security Interest

Different types of collateral have different requirements for perfection. In general, a security interest is perfected when (1) it attaches and (2) one or more of the following occurs:

  • The creditor files a financing statement (Form UCC1) with the Secretary of State.
  • The creditor takes possession the collateral.
  • The creditor takes control of the collateral.
  • For certain types of collateral, a security interest is automatically perfected when it attaches.

Who Has Priority?

The general rules for priority are:

  • Among creditors with perfected security interests, the first to file or first to perfect has priority.
  • Perfected security interests have priority over unperfected security interests.
  • Among unperfected security interests, the first to attach has priority.
  • Liens have priority over unperfected security interests.

Should I Seek an Experienced Attorney?

Whether you would like to enter a security agreement or need to enforce your agreement, an experienced business lawyer or real estate lawyer can aid you in protecting or exercising your property rights.

Photo of page author Brandon Rose

, LegalMatch Legal Writer and Attorney at Law

Last Modified: 05-27-2014 04:02 PM PDT

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