Chapter 35 secured transactions in personal property
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Chapter 35: Secured Transactions in Personal Property - PowerPoint PPT Presentation

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Chapter 35: Secured Transactions in Personal Property. Definitions. A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation.

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Definitions l.jpg

  • A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation.

  • The property that is subject to the interest is called the collateral, and the party holding the interest is called the securedparty.

  • Attachment is the creation of a security interest.

  • To secure protection against third parties’ claims to the collateral, the secured party must perfect the security interest.

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Signed by Debtor

Intent to Create Security Interest


Description of Collateral

(Oral OK if Creditor is in Possession of Collateral)

Contemporaneous Exchange


Creditor Previously Gave Loan

Debtor’s Interest in Collateral

Creation of Security Interests

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Classes of Collateral

  • Tangible collateral is divided into classes (based on the debtor’s intended use, not on physical characteristics):

    • consumer goods,

    • equipment,

    • inventory,

    • general intangibles,

    • farm products, and

    • fixtures.

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Consumer Goods

Used or bought primarily

for personal, family, or

household use

Used or bought primarily

for business use


Farm Products

Held by debtor primarily

for sale on lease to others;

or raw materials, work in

progress, or materials

consumed in a business

Crops or livestock or supplies used or produced in farming

Classes of Tangible Collateral

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  • Perfection of a security interest is not required for its validity, but it does provide the creditor with certain superior rights and priorities over creditors with an interest in the same collateral.

  • Perfection can be obtained through possession; filing; automatically, as in the case of a PMSI in consumer goods; or temporarily, when statutory protections are provided for creditors for limited periods of time.

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Signed by Debtor

File Financing


Description of Collateral

Address of Debtor

Address of Creditor


Depends on Type of Collateral








Perfection of Security Interests

Possession -- Creditor Retains Possession of Collateral

PMSI in Consumer Goods -- Automatic Perfection

Motor Vehicles -- Notation in Title Registration

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Priority Among Creditors

  • Unperfected, unsecured creditors have the lowest priority and are paid only if sufficient assets remain after priority creditors are paid.

  • Secured creditors have the right to take the collateral on a priority basis, based on whose interest was the first to attach.

  • A perfected secured creditor takes priority over an unperfected secured creditor.

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Priority Among Creditors

  • Multiple perfected secured creditors with interests in the same collateral take priority generally on a first-to-perfect basis.

  • Exceptions include PMSI inventory creditors who file a financing statement before delivery and notify all existing creditors, and equipment creditors who perfect within ten days of attachment of their interests.

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Priority goes to:

Unsecured vs. Unsecured

Priority goes to:

Unsecured vs. Secured

Priority goes to:

Secured vs. Secured

Priority goes to:

Perfected Secured vs. Secured

Priority goes to:

Perfected Secured vs. Perfected Secured

Priorities of Conflicting Interests

Neither -- equal


One whose interestattached first

Perfected Secured

One who perfected first

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Lease to

Third Party

First, to pay the expenses of the

secured party in connectionwith the default

Proceedsgo to:

Second, to pay the primary debtsecured by this collateral.

Third, to pay other debts secured by this collateral

Last, any balance

goes to debtor

Proceeds When Creditor Sells Collateral

When secured party repossesses collateral securing a debt, he may dispose

of it by:

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Priorities When Debtor Sells Collateral

  • A buyer in the ordinary course of business always takes priority even over perfected secured creditors.

  • A buyer not in the ordinary course of business will lose out to a perfected secured creditor but will extinguish the rights of an unperfected secured creditor (unless the buyer had knowledge of the security interest).

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Creditor’s Right to Repossess

  • Upon default, a secured party may repossess the collateral from the buyer if this can be done without a breach of the peace.

  • If a breach of the peace might occur, the secured party must use court action to regain the collateral.

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Creditor’s Duty in Sale of Collateral

  • If the buyer has paid 60 percent or more of the cash price of the consumer goods, the seller must resell them within 90 days after repossession unless the buyer, after default, has waived this right in writing.

  • Notice to the debtor of the sale of the collateral is usually required.

  • A debtor may redeem the collateral prior to the time the secured party disposes of it or contracts to resell it.

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Buyer not in

Ordinary Course

Buyer in



Does NOT have priority over:

Has priority over:

Has priority over:




(except consumer PMSI –Then, buyer has priority)




(Assuming buyer had no knowledge of security interest)







Priorities When Debtor Sells Collateral

When a debtor sells the collateral securing a debt, who has priority in the collateral: the buyer or the creditor?

What kind of buyer?