How to Become a Secured Party Creditor

By George Lawrence J.D. - Updated June 05, 2017

A secured party creditor is someone who holds a security interest in the property of a debtor. Becoming a secured party involves writing a specific type of contract called a security agreement, and filing that agreement with your state. A security interest is the legal term used to describe your right to collateral property, or proceeds from the sale of that property, if the debt isn't repaid.

Start With the Security Agreement

A security agreement doesn't require any particular words or phrasing. However, there are a few prerequisites. The agreement must be authenticated by the debtor with a signature or its electronic equivalent, and the agreement must adequately describe the property the debtor offers as collateral.

For example, assume Sam loans a sum of money to Doug so that Doug can buy a new car. To secure Doug's obligation to repay Sam, Sam requires Doug to grant him a security interest in the brand new high definition TV Doug paid cash for a couple of weeks ago. Sam's security interest in the TV means that if Doug does not repay Sam, Sam can take Doug's TV or force a sale of Doug's TV and receive the money for it. This only works if Doug owns the TV outright, otherwise the financing company has the right to seize it for non-payment. In this case, the completed security agreement could simply describe the collateral as "Doug's brand new brand name high definition television located in his living room at his address."

Agree On the Terms

Spell out the penalty for failing to pay, and outline a repayment schedule in the security agreement. While this is not strictly required by law, it's a smart step to take. It will clearly indicate both parties' obligations to one another, and protects the secured party if the debtor challenges the agreement in court. In the car loan example, the agreement might read "Doug agrees to pay Sam $100 each month, payable on the 15th of each month, until the loan is repaid. If Doug fails to make a payment, Sam has the right to demand the entire amount due. If Doug cannot pay the entire amount due, Sam has the right to exercise his rights as a secured party under this agreement."

Prepare the Official Forms

Financing statements are forms used to provide notice to other potential creditors that a security exists as collateral of a debtor, or in other words it's a warning that the property has already been used as collateral. The form is commonly called a UCC-1. It is available online or at your local Secretary of State's office. In the car loan example, Sam would prepare a filing statement indicating he has a security agreement with Doug and that he has a security interest in Doug's high definition TV. Sam would travel to his Secretary of State's office and fill the form out.

File the Forms

In order to give notice to all other potential creditors, and protect your interest from anyone else making a claim on the collateral, you must file the financing statement with your local Secretary of State's office or whichever other administrative body your state's law specifies. You must pay a filing fee, which varies by state. In the car loan example, Sam is technically a secured party creditor as soon as Doug signs the security agreement. However, filing a financing statement puts all other creditors on notice that Sam has a security interest in Doug's TV. Therefore, if Doug goes bankrupt and can't pay his debts, Sam will have first dibs on the TV before other creditors.

About the Author

Based in Traverse City, Mich., George Lawrence has been writing professionally since 2009. His work primarily appears on various websites. An avid outdoorsman, Lawrence holds Bachelor of Arts degrees in both criminal justice and English from Michigan State University, as well as a Juris Doctor from the Thomas M. Cooley Law School, where he graduated with honors.

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