A security interest provides lenders with the promise of repayment if a borrower defaults on a loan. In this instance, the lender may recover the amount of the loan by seizing and selling the asset used as the loan’s underlying collateral. A security interest is typically significant in debtor bankruptcy cases since, in most cases, it allows secured creditors to collect their debts before unsecured creditors, those obligors of a debtor who do not possess a security interest.
Perfection is an important component of a secured transaction and in many cases achieved by the filing of financing statements with the California Secretary of State. These forms are referred to as UCC financing statements. UCC stands for “Uniform Commercial Code” which is the model text for many laws affecting secured transactions in California. Once the UCC-1 form has been filed, the creditor establishes a relative priority with the debtor’s other creditors.
Financing statements such as a UCC-1 are used to effectively give third parties initial notice of the filing party’s interest in the subject collateral. UCC-3 financing statements are used to terminate, continue, amend, or assign an interest identified under a UCC-1. A creditor’s rights against the debtor are based on the parties’ loan agreement rather than the financing statement. A financing statement does not create a lien nor does it create any additional rights against the secured party. Typically, a debtor authorizes the filing of a financing statement for the collateral described in the security agreement when it enters into the security agreement.
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