How to Become a Secured Party Creditor

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Security agreements are contracts between lenders and debtors that take much of the risk out of lending. In these agreements, the borrower puts property up for collateral in exchange for the funds. If the debtor goes into default on these funds, the person or organization who provided the loan may claim the property.

Many organizations use security agreements and their associated paperwork in legitimate business matters. However, many scam artists use similar language and forms to take money from people and even commit identity theft. Understanding the difference between legitimate security agreements and known scams can save people time, money and frustration.

Secured Party vs. Secured Party Creditor

In a security agreement, the term secured party refers to the person or organization that lends the money. Typically, the secured party is a bank or other financial institution. However, if they loan money through a security agreement, individuals can become secured parties.

Scammers sometimes use the term secured party creditor when trying to convince people to file liens against public officials, the United States government or other organizations. While seeing this term is not proof that someone is running a scam, it should serve as a red flag. People may be especially suspicious of those who promise to make someone a secured party creditor to access secret bank accounts that the government holds.

Entering a Security Agreement With a Debtor

A family member or friends cannot just loan money with a handshake and a promise with the hope of being a secured party. To be a secured party, a lender must enter a security agreement with the debtor. The form must be able to stand up to legal scrutiny, or else, the debtor could default and get out of giving up the collateral.

While every security agreement looks different, they all should:

  • Accurately describe the collateral with as much detail as possible.
  • Outline the conditions under which the debtor defaults.
  • Clearly state the repayment expectations.
  • Have covenants, which place limits on the debtor’s ability to borrow from others.

Organizations that often enter these agreements as part of their business strategies typically have lawyers who draft contracts for them. However, individuals may not have access to the same resources. Some online legal service providers allow users to create security agreements from a template.

If the debtor goes into default, the secured party may file a UCC-1 form with their state’s secretary of state or similar authority. This filing serves as a lien on the property. Lenders can bring the collateral property into their possession. Each state has its own procedures for filing UCC-1 forms, so lenders should check with those authorities first.

Beware of Scams

The Federal Bureau of Investigation, the Federal Trade Commission and the United States Treasury warn of schemes in which scammers convince victims that all citizens have some kind of secret account with the federal government. Though these scams change and evolve, each iteration has a few important qualities in common. The con artists claim that:

  • Everyone has a secret bond or bank account.
  • People can get the money from their accounts by becoming secured party creditors.
  • The scammer’s special kit has all the forms someone needs to get the money.

These schemes have people believe that once they declare themselves secured party creditors, they can file liens against the government on these secret accounts. Law enforcement may refer to these schemes as redemption, bond fraud or strawman cons. What makes these scams so dangerous is that they use real legal forms and legal-sounding jargon to convince people they’re legitimate.