Secured Transactions Law: An Overview
Secured transaction law governs the creation, perfection, priority, and enforcement of security interests in personal property. This area of law provides lenders with a legal mechanism to secure their loans with collateral provided by borrowers, balancing the interests of both creditors and debtors.
A security interest arises when, in exchange for a loan, a borrower agrees in a security agreement that the lender (the secured party) may take specified collateral owned by the borrower if the borrower default on the loan. This security interest also ensures that if the debtor declares bankruptcy, the secured party can recover the value of the loan by taking possession of the specified collateral, rather than receiving only a portion of the debtor’s property after it is divided among all creditors.
Security agreements are contracts. Article 9 of the Uniform Commercial Code governs security interests in personal property. It has been adopted, with some modifications, by every state. A security agreement must comply with other state laws governing contracts. This includes fixtures, which are personal property attached to real property, such as a water heater. Statutory liens, like mechanic’s liens, are generally governed by specific statutes rather than Article 9.
Article 9 contains a statute of frauds which requires a security agreement to be in writing unless it is pledged. See § 9-203(1) of the UCC. A pledged security agreement arises when the borrower transfers the collateral to the lender in exchange for a loan (e.g., a pawnbroker). See §§ 9-102(2) & 9-310 of the UCC. Article 9 also provides for the resolution of conflicts if there are multiple security interests or liens on specific collateral. See §§ 9-310 - 9-316 of the UCC. Part 5 of Article 9 deals with the procedures to be followed when a borrower defaults. See §§ 9-501 - 9-507 of the UCC.
Perfection of Security Interests
Perfection is the process by which a secured party gains priority over other parties with claims to the same collateral. This usually involves filing a public notice, such as a financing statement, with the appropriate government office (see §§ 9-302 - 9-305 of the UCC).
[Last updated in June of 2024 by the Wex Definitions Team]
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