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Security Agreements; Secured Debts
A debt is secured when the creditor takes or accepts the pledge of real or personal property as collateral. A security interest is a claim or debt for which a creditor holds an interest in collateral. It can be created in one of two ways:
- A pledge of assets requiring that the debtor deliver to the creditor collateral or documents of title that represent the assets pledged.
- An agreement, called a "security agreement," between a secured creditor and a debtor. The essence of the agreement is the statement "Debtor hereby creates a security interest in favor of (secured party) in the following property: (insert description)." After entering into a security agreement, the secured party may be entitled to take possession of the identified personal property (collateral) in the event of a default by the debtor.
Perfecting the Security Interest
A secured creditor can protect his or her security interest against the claims of third parties in one of the following ways:
- Take possession of the collateral.
- File a notice with the appropriate filing officer that the creditor has a security interest in the property covered by the security agreement. A Financing Statement also must be filed to perfect (prove the validity of) the security interest.
Source: "Manual of Credit and Commercial Laws," edited by Charles M. Tatelbaum and John K. Pearson, available at the NACM Bookstore.