How Do I Obtain a Security Interest in Personal Property?
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 competed 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.