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A security interest grants the holder thereof a right to take remedial action with respect to the property that is subject to the security interest upon the occurrence of certain events -- the classic example being the non-payment of a loan. The holder may take possession of such property in satisfaction of the underlying obligation, or, more common, the holder will sell such property (either by means of public auction or private transfer) and apply the proceeds of such sale to the underlying obligation. To the extent that the proceeds of the sale exceed the amount of the underlying obligation, the debtor is entitled to the excess; and, to the extent that the proceeds of the sale do not exceed the amount of the underlying obligation, the holder of the security interest is entitled to a deficiency judgment pursuant to which the holder can institute additional legal proceedings aimed at recovering the full amount of the underlying obligation from the debtor. The term "security interest" is often used interchangably with " Lien "; that being said, the term "lien" is more often associated with real property collateral than with personal property collateral. Security interests in most types of personal property are governed in the United States by Article IX of the Uniform Commercial Code. A security interest is typically granted by a contract called a "security agreement". Upon execution of such contract by the debtor, the secuirty interest exists with respect to the property in question assuming that the debtor has an ownership interest or ownership-like interest therein and assuming that some form of value has been conferred by the holder of the security interest to the debtor (such as a loan). Also, upon execution of such contract, the security interest becomes enforceable between the holder thereof and debtor; however, in order for the rights of the holder of the security interest to become enforceable against third parties, the holder must "perfect" the security interest. Perfection is typically achieved by filing a document called a "financing statement" with a governmental authority (often, the secretary of state in which a corporate debtor is incorporated -- although there are various rules applicable to natural persons and certain types of corporate debtors), however, perfection can also be obtained by taking possession of the collateral in question (assuming the collateral in question is tangible property). Absent "perfection", the holder of the security interest will not be able to enforce its rights in the collateral vis-รก-vis third parties, such as other creditors who claim a security interest in the same collateral or a trustee in bankruptcy. |
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