Taking a security interest in a debtor’s collateral is a way to keep pressure on the debtor to make consistent, timely payments. A security interest is simply a lien on assets given to secure an obligation. The power of a creditor’s interest is in the creditor’s ability to enforce the interest by repossessing the collateral upon default.
In order to obtain an enforceable security interest in collateral, certain conditions must be met. While the UCC provides more specific details on those conditions, in summary, value must be given in return for the security interest and there must be a signed writing describing the collateral and/or the creditor must be in possession or control of the collateral. Once an enforceable security interest has been created, it must be perfected. Some types of collateral are perfected automatically when they become enforceable, some require a filing, and some may be perfected by control.
Once a creditor’s security interest has been established, how can the interest be enforced and the collateral repossessed? A creditor with a perfected security interest in collateral can take possession of the asset(s) in two ways. First, the creditor could recover the property without legal process if it can do so without breaching the peace. It is recommended that the security agreement include a provision giving the creditor a right to enter on the debtor’s premises and retake the collateral in the event of default. Second, the creditor can file a claim & delivery lawsuit and have a court order the property be turned over to the creditor. This is the safest manner of repossession, but it is more costly and requires a bond if the creditor seeks a prejudgment recovery of the collateral.
If you have any questions or comments regarding the UCC, security interest, or recovering collateral, please feel free to contact the attorneys of Vann Attorneys, PLLC.