Attorney Deanne Koll explains the two steps to obtaining a security interest in personal property: attachment and perfection.
Disclaimer: This video is designed to be educational and informative, but it is not legal advice. Collection law is constantly evolving and subject to change. Each situation is unique, and each case should be addressed to fit the unique situation.
There are two steps to obtaining a security interest in personal property owned by a debtor: attachment and perfection. Attachment occurs when the debtor grants the security interest to the creditor.
That’s usually completed by the debtor executing a general business security agreement or specific collateral security agreement. A properly executed attachment makes that agreement binding between the debtor and creditor.
Perfection is the second step and is important to preserve your rights against other third party claimants.
Depending on the collateral, perfection may be completed by filing a UCC-1 (sometimes called a financing statement), by having your name on the title (such as listing as a secured party on a car title), or by actually possessing the collateral (such as a stock certificate in a closely-held business).
A properly perfected security interest ensures that your interest in that collateral cannot be leap-frogged by some later creditor. Said another way, if you fail to properly perfect your security interest, a later creditor could lend money to the debtor and sneak in line as a priority interest holder on that collateral.
Perfection (or non-perfection) comes into play once a customer defaults and all of the creditors are getting in line to try to collect against a debtor’s assets. It’s important for a creditor to have a properly perfected security interest in order to preserve its rights to repossess its collateral.