Secured Transactions: May I Bore You for a Moment?

Secured Transactions: May…

“Secured transactions” are as complicated (and some might say as boring) as they sound. They involve concepts such as attachment, perfection, priority, financing statements, etc. They are governed by the seemingly innocuous “Article 9” of the Uniform Commercial Code, and comprised an entire law school class that I would rather not relive. But, a decent understanding of how they work can go a long way in your creditor/debtor relationships. This is because properly crafted secured transactions are often the difference between collecting money you are owed and writing off the entire deal as a bad debt.

A secured transaction is any deal (other than a finance lease) that combines a debt with a creditor’s interest in a debtor’s personal property. For example, I sell you 3,000 widgets. In exchange for your promise to pay me for those widgets in the future, I agree to accept an interest (a security interest, to be exact) in your factory equipment (the collateral) to secure payment for the debt. If you default on our agreement, I may take (repossess) your factory equipment and sell it to satisfy the debt.

I’ll spare you the details on how exactly the security interest becomes effective (that’s another article in and of itself), but you can probably see why security interests are helpful: the debtor needs to pay the debt because he does not want his equipment taken, or the debtor’s business is in trouble and there is no cash to pay you, so you can proceed against the collateral.

Still with me?

Before I let you go, it is important to know what does not happen in a secured transaction. First and foremost, other than a special document that is filed with Michigan’s Secretary of State, there is no physical evidence of a security interest on the collateral. There is no label or notice that is physically attached to the factory equipment in the scenario above, for example. Additionally, these transactions do not (and cannot) involve real estate as collateral. Finally, obtaining a security interest does not guarantee that you will be first in line to take the collateral and apply it towards the debt you’re owed; it is possible another creditor (such as a bank) acquired its security interest before you.

If I lost you somewhere after “secured transactions,” fear not: your good friends at Wright Beamer are equipped and ready to handle all of these details for you!

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