secured transactions
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 reviewed in June of 2024 by the Wex Definitions Team ]
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