Secured Party Creditor Basics

Published: 31st May 2010
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A secured party creditor holds an interest in the goods or property of another person or business. This can be real estate property or personal property that is usually used as collateral. It is a legally recognized status in the US court system. In the event that a person defaults on a loan or agreement guaranteed with that property as collateral, the secured party creditor would receive the property instead of the money owed to satisfy the debt. If there is more than one secured party creditor seeking payment from the same collateral, the one that filed paperwork first would receive satisfaction of their debt before anyone else. Any leftover money or collateral would go to the next in line until all of the assets are used up. When all of these creditors have been satisfied, only then would the unsecured creditors receive their payment. This process is frequently seen in bankruptcy cases.

The most common secured party creditors are financial institutions that regularly deal with more expensive loans, such as mortgages and vehicle loans. The higher the price of the loan, the more collateral is necessary to receive the loan. This is because there is a higher risk associated with more money and higher payments. Landlord and property management companies are also frequently listed as secured party creditors to apartment leases. In the event of a default on rental payments, the person would not only be evicted, the back rent would have to be paid before the debt is forgiven. A less common secured party creditor is called a "straw man." This is a special type of redemption process that legally allows a person to initiate the process under a different name.

To be considered a secured party creditor, a person or business must file the proper paperwork through the Uniform Commercial Code (UCC). A special form called the UCC 1 must be filed properly through the local Secretary of State's office and approved before the entity can be considered a secured party creditor.

When a person or company enters into a contract to be paid by that entity, it is considered a legally binding agreement. It must be agreed to by the debtor, which is normally done in writing, and the item or items used as collateral must be described well enough so that there is no question as to what the items are. This property must have a comparable value to it in order to be considered as collateral. The party providing the loan or service as a creditor must create a finance statement regarding the collateral. This form and other paperwork is then filed with the Secretary of State, along with a filing fee.

Once a person or company has successfully become a secured party creditor, should the debtor fail to pay off the loan in the terms of the agreement, the collateral can be collected.

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