More on negotiable instruments.
Secured transactions are cases where a note or other negotiable instrument has its value guaranteed by a personal property asset. The property used to secure the note is the security or the collateral.
Both sides of a secured transaction have obligations they must honor.
Debtor is the party who owes money. The secured party is usually the creditor or a third party. A security agreement of some sort must be signed.
A written security agreement must:
- Describe the collateral
- Promise payment and have terms of payment
- Set forth remedies in the event of default
- Be signed by debtor
There must be record of credit being received. The debtor in this case has rights regarding the collateral, but does not own the collateral.
In order to claim rights regarding the collateral, the debtor must perfect the collateral. In Texas, this means filing some paperwork with the state, specifically a financing statement.
A financing statement must include:
- Debtor’s name and address
- Creditor’s name and address
- Clear and unambiguous description of collateral
Possession of the collateral also serves to perfect the collateral. Negotiable instruments, money, and other similar properties can only be perfected by taking possession of them.
A Floating Lien can be used to secure a line of credit. A floating lien demands that the debtor hold some amount of nonspecific property at all times as collateral.
When dealing with fungible goods, the creditors have a pro rata interest, meaning the creditors have an interest in the goods proportionate to the value of the fungible good stock.
Purchased Merchandise Security Interest — PMSI. Designed to protect merchants for a reasonable period of time.
Creditor’s remedies — In the event of default, creditors have the right to repossess the item and sell or retain it. For consumer goods, if the customer has already paid 60% of the amount owed, the creditor cannot sell it; only retain it.
In some cases, the debtor has a redemption right, meaning he can pay off the entire debt before the collateral is sold and thereby gain full ownership of it.