Creating Enforceable and Useful Security Agreements

If someone owes you money or you are thinking of loaning them money, one big concern may be how you will be paid back.

Benefits of a Security Agreement

Many people want to do what big banks do, when they give large loans out, like real estate loans that come with mortgages: secure property, so that even if the debtor can’t pay you, you have some tangible, physical object with a value that you can possess or repossess, sell, and at least recoup some of what you are owned.

Another benefit to a secured loan is that the security survives the bankruptcy of the debtor. You may never be able to recover any money from the debtor if he or she or it files for bankruptcy—but you can still enforce a security lien, even if the underlying debt has been discharged.

Creating a Valid Agreement

All this is great, and can lead you to want to turn your debt into a secured one. But doing that isn’t as easy as having a contract that just says that the debt is secured.

There are certain specific requirements to make a debt one that is secured by property. If you do it incorrectly, not only will the debt not be considered secured debt—but you could wind up in legal trouble for asserting a security on property that isn’t actually secured.

All agreements to secure property must be in writing. Verbal agreements are insufficient. And the writing has to be signed by anybody with an ownership interest in the property. So, if a debtor is pledging security that someone else owns or is a co-owner to, that other person needs to agree to the security agreement along with the debtor.

Do you know what property it is that is secured—that is, what property can be repossessed, foreclosed on or taken and sold, to pay off the debt? If you don’t know, that may be a problem, because the identity of the property must be specifically detailed in the written security agreement.

Generally saying that all property is secured, or the debtor’s personal property, or any property in the debtor’s possession, or similar language, won’t create a perfected security interest. There must be identification.

That can include makes, models, manufacturers, age of the product or year of manufacturer, serial numbers, or identifying physical information.

Not Required But Helpful

There are other things you can include, which both protect you (that is, the protect the security which is protecting your debt), but which also clearly indicate that the agreement is intended to be a security agreement.

For example, your debt can require that the secured property be maintained, or that the owner notify you of any changes in location. If the security is larger, it can require that insurance be maintained on the secured property. It can also require the payment of legal fees, in the event of a default.

Are your security agreements valid and enforceable? Let us help.  Call the West Palm Beach business litigation attorneys at Pike & Lustig today.

Sources:

legalnature.com/guides/everything-you-need-to-know-about-security-agreements

nolo.com/legal-encyclopedia/how-attach-perfect-security-interest-under-the-ucc.html