Secured Transactions - 2006 - A - SECURED TRANSACTIONS...

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SECURED TRANSACTIONS Introduction “Security interest” -- §1-201(35) o An interest in personal property or fixtures which secures payment of performance of an obligation o Note: Article 1 is the general article Options outside of secured transactions o Hypo: Suppose Company borrows $10,000 from Bank and signs a promissory note to pay it back in 6 months; what happens when Company hasn’t paid up in 6 months? o Options: Sue for performance Call them and ask them to pay Report them to a credit bureau Writ of garnishment if you can find anyone who owes the Company money, you can get a writ to force them to pay you instead Wage garnishment served on debtor’s employer But 75% of disposable portion of paycheck is exempt! o Suit File complaint for breach of promise to pay; ask for amount due, plus costs and attorneys fees Take the complaint to court, pay the fee, then serve the defendant Wait for the answer If there is no answer, move for a default judgment If there is an answer, litigation begins, but months later, Bank still isn’t paid You get a judgment, but Company doesn’t pay the judgment To enforce the judgment, go to the sheriff, who will physically go out and attach the property of the Company Altogether, this has cost the Bank a lot! o General rule: An unsecured creditor has no property interest in any specific piece of the debtor’s property o First to grab rule : the creditor to execute on the judgment first wins o Creditor-debtor relationships are matters of state law, but you could make a case federal by forcing the debtor into an involuntary bankruptcy Bankruptcy: TIB is paid first, then secured creditors up to their collateral, then unsecured creditors are paid pro rata Creating a Security Interest Why secured credit? o Remember, this is an “interest in personal property” Property ownership is a bundle of rights, and a security interest simply gives another party part of this bundle o Basic idea: The debtor owns the property, unless he is in default; if he is in default, the creditor can simply come and take possession of the property without any court proceedings The security interest includes the right of possession until the debt is repaid The debtor gives up a right in the property, which the debtor must have the right to give up 1
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o Theory: Because lenders have a legal mechanism to get this property right and to have possessory rights transferred to them, they are more likely to loan money to people, even to people who don’t have great credit, and at possibly lower interest rates Good for the debtor because he can use credit Good for the secured creditor because he has more security Maybe good for the unsecured credit because he can charge more o Is secured credit fair?
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