A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. In order to protect against nonpayment, sellers and lenders may require the debtor or buyer to sign a security agreement when credit is extended. When a default occurs, the secured party may rely upon the collateral for payment, rather than filing a lawsuit for breach of contract. Collateral refers to items of property in which a security interest is granted by the debtor.

Uniform Commercial Code

This area of the law is mostly covered by the Uniform Commercial Code as adopted by various states, and by state motor vehicle laws. In a typical personal property transaction, in the event that the debtor fails to pay, the creditor may peacefully repossess the collateral, and sell the collateral at a public or private sale following reasonable guidelines. The proceeds of the sale are then applied to the debt, and the reasonable recovery and legal expenses.

If the proceeds exceed the debt and permitted charges, the balance would be paid to the debtor. If the proceeds do not cover these items, the creditor may, in some states, in many instances, file an action for a "deficiency" balance. Special rules apply, and vary by state.   For more detail, see the "Secured Transaction Law Materials" at Cornell Law School's Legal Information Institute by clicking here.   ("Uniform" state laws are laws which have been proposed for uniform adoption by states, the better known examples being the Uniform Commercial Code and Uniform Probate Act. See Drafts of Uniform and Model Acts at U. of Pennsylvania.)

Recording of Liens

Form filing and document retrieval are important aspects of secured transactions. The recording of such documents may determine whether a transaction is secured or not secured. Many good resources are available for state rules on the internet. Keep in mind that the Uniform Commercial Code is not exactly uniform. You must actually look at the laws passed by the individual states. In many states, special rules also cover credit sales to consumers. See LAWDOG® State Laws here.