Excerpt from Practical Guidance

Creating Perfect Security Interests — A Primer

Law360, New York (May 18, 2015, 9:40 AM EDT) -- The law of secured transactions involves the creation and enforcement of security interests. A security interest arises when a borrower enters into a contract that authorizes the lender or secured party to take collateral that the borrower owns if the borrower is unable to pay back the loan. A security interest protects the lender in that if the borrower should happen to default on the loan, the lender will be able to recover the loan amount by taking such collateral. In the context of a bankruptcy case, a secured creditor collects its payment before creditors without a security interest (i.e., unsecured creditors) and are thus situated higher in the priority scheme. Notably, an unperfected security interest is subordinated to a lien creditor and trustee in bankruptcy. There are four main methods of perfecting an attached security interest, including the filing of a properly filled-out financing statement with the applicable Uniform Commercial Code filing office, possession of the collateral by the secured party, control over the collateral by the secured party, and, in rare circumstances, mere attachment of the security interest may automatically perfect the security interest....

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