Bankruptcy and Secured Transactions

Question 1

Secured Transaction

Answer 1

Any transaction in which a debtor gives a creditor a security interest in personal property or fixtures

Question 2

Secured Credit

Answer 2

Permits a consumer or business to make large-scale purchases while assuring the sellers and lenders that they can obtain complete, or at least partial, payment from the secured property, if necessary

Question 3

Pledge

Answer 3

Oldest and simplest type of secured transaction

The debtor provides the creditor with physical possession of some of the debtor’s property; this collateral may consist of tangible items or intangible personal property

If the debtor defaults, the creditor sells or uses the collateral to satisfy the debt

One problem with a pledge is that the debtor frequently will not or cannot turn over possession of his/her property

Question 4

Attachment (security interest)

Answer 4

To make the security interest effective between the debtor and creditor, the interest must attach to the secured property (the collateral)

Question 5

Three Requirements Of An Attachment

Answer 5

1. A written agreement sets forth a security interest, describes the collateral, and is signed by the debtor
2. Value is given by the secured party to the debtor
3. The debtor has rights in the collateral

Question 6

Value (security interest)

Answer 6

“Value” arises from commitments to extend credit, from consideration sufficient for a contract, or from preexisting consideration

When the secured party obtains the possession of the collateral (a pledge), no written agreement is necessary

Question 7

Perfection (security interest)

Answer 7

To make the security interest effective against third parties, it must be “perfected”

Perfection gives the secured party over other parties seeking to attach or otherwise use the collateral

Question 8

Methods of Obtaining a Perfection

Answer 8

Possession constitutes perfection for pledges

Control is the only way to perfect a security interest in a letter of credit or in a deposit account

Automatic Perfection, or, perfection by attachment, usually involves a purchase-money-security interest (PMSI) in consumer goods other than fixtures or motor vehicles

File a Financing Statement which must contain the debtor’s signature, the names of both the debtor and the secured party, and a description of the collateral; secured party has the duty to file a finance statement

Question 9

Control (to obtain perfection)

Answer 9

Such control exists only if: the secured creditor is the depositary bank where the account is maintained, the debtor, secured creditor, and depositary bank have agreed that the bank will follow the creditor’s instructions without the debtor’s further consent, and/or the creditor becomes the depositary bank’s customer concerning account

Question 10

Automatic Perfection (PMSI)

Answer 10

UCC defines a PMSI as a security interest that is:
-held by the seller of collateral in order to secure all or part of the sales price, or
-held by a person lending money or otherwise giving value that the debtor uses to acquire or use the collateral

Question 11

Default

Answer 11

A default on a debt is not defined in UCC Article 9; the parties usually state in their security agreement the conditions that will constitute a default

Another type of default may be to breach a warranty that no liens or other security interests cover the same collateral as that relied on in the security agreement

Question 12

Rights of Secured Party Prior to Default

Answer 12

The secured party:
-may release or assign all or part of the collateral
-may file an extension or amendment of a financing statement, although the latter also requires the debtor’s signature
-if in possession of the collateral, must use reasonable care to preserve it