A security interest arises when in exchange for a loan a borrower agrees, in a security agreement, that the lender (the secured party) may take specified collateral owned by the borrower if he or she should default on the loan. A security interest also provides the secured party with the assurance that if the debtor should go bankrupt he or she may be able to recover the value of the loan by taking possession of the specified collateral instead of receiving only a portion of the borrowers property after it is divided among all creditors. See Bankruptcy.
Security agreements are contracts. Article 9 (http://www.law.cornell.edu/ucc/9/overview.html) of the Uniform Commercial Code (http://www.law.cornell.edu/ucc/) governs security interests in personal property. It has been adopted, with some modifications, by every state. A security agreement must comply with other state laws governing contracts. See Contracts.
Article 9 of the Uniform Commercial Code covers most types of security agreements for personal property that are both consensual and commercial. See§ 9-102(2) (http://www.law.cornell.edu/ucc/9/9-102.html) and §9-104 (http://www.law.cornell.edu/ucc/9/9-104.html) of the code. This includes fixtures, personal property that is “fixed” to real property such as a water heater. Statutory liens (e.g. a mechanics lien) are generally not governed by Article 9 but by the individual statute that creates them.
See §§9-102(2) (http://www.law.cornell.edu/ucc/9/9-102.html) & 9-310 (http://www.law.cornell.edu/ucc/9/9-310.html) of the code. Article 9 contains a statute of frauds which requires a security agreement to be in writing unless it is pledged. See § 9-203(1) (http://www.law.cornell.edu/ucc/9/9-203.html) of the code. A pledged security agreement arises when the borrower transfers the collateral to the lender in exchanger for a loan (e.g., a pawnbroker). The “perfection” of a security agreement allows a secured party to gain priority to the collateral over any third party. To perfect a security agreement the filing of a public notice is usually required. See §§ 9-302 – 9-305 (http://www.law.cornell.edu/ucc/9/9-302.html) of the code.
Article 9 also provides for the resolution of conflicts if there are multiple security interests or liens on specific collateral. See §§ 9-310 – 9-316 (http://www.law.cornell.edu/ucc/9/9-310.html) of the code. Part 5 of Article 9 deals with the procedures to be followed when a borrower defaults. See §§ 9-501 – 9-507 (http://www.law.cornell.edu/ucc/9/9-501.html) of the code.