In this video, 20.01 – Secured Transactions – Lesson 2, Roger Philipp, CPA, CGMA, continues from Lesson 1, describing types of assets that can become collateral establishing security interest in a loan. There are three ways for a creditor to protect their interest in money loaned to a debtor: by obtaining a security interest called collateral, by obtaining a guarantor through suretyship, or by forcing the debtor into bankruptcy and hoping to get paid as either a perfected secured creditor or a general unsecured creditor.
Secured transactions involving tangible and personal property, as governed by Article 9 of the Universal Commercial Code, are the topic of this lesson. In addition to inventory, equipment, and consumer goods, chattel paper (or writings that evidence both a monetary obligation and a security interest in specific goods or equipment) can serve as collateral for a loan. The creditor legally takes the asset as collateral on the loan, and will physically take possession of the asset if the debtor defaults on the loan.
Furthermore, in obtaining a security interest, a creditor is protecting themselves from DOTS – the debtor, other creditors, a trustee in bankruptcy, and any subsequent purchaser from the debtor without knowledge of perfection. For the creditor to protect themselves from the debtor, they must only attach. To protect themselves from third parties, the creditor must attach and perfect the security interest.
Roger concludes the video by going on to define and describe PMSIs, or Purchase Money Security Interests.
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Video Transcript Sneak Peek:
A couple of other items here. Chattel paper, it's writings that evidence both a monetary obligation which says buy equipment on credit, the loan agreement then becomes the collateral for another loan by the previous creditor, and a security interest in specific goods.
It could be intangibles like in Account Receivable, any right to payment for goods or services, or a negotiable instrument, warehouse receipts, bill of ladings, so it could be a tangible collateral, it could be an intangible collateral, but the key point here is as follows: I loan you money, or I give you credit to acquire this asset.
What happens is we then take the asset as collateral for the loan. For example, I go to the store. This is Sears, this is RP, I go to Sears and I go, "Hey, I like that TV, how much is it?" They go $3,000, "Wow, I love this new "147 inch TV," right, they just keep getting bigger and bigger, so I go in and I say, "Okay, let me go ahead and get that," so I give you my credit card for example. And I give you my credit card so I can get the TV. I give you my credit card, you run it through, and basically what you're doing is you're giving me the credit to buy the asset.
And let's say that's a TV, what is the asset to me, the TV, it is consumer goods. You then don't physically, but legally you take the TV as collateral for the loan. Which means that if I default and I stop paying, you're gonna come to my house and take back my TV. My kids ain't gonna like you, but you're gonna take back my TV. Same thing with equipment, you loan me money, I buy a piece of equipment, legally you take that piece of equipment, and if I don't pay, you'll legally come in and take that piece of equipment. So that is the concept that we're dealing with.
Now in order to do this, who were you trying to protect yourself, who was the creditor trying to protect themselves from? They're trying to protect themselves From DOTS, D-O-T-S. They're trying to protect themselves from the debtor, from other creditors, from a trustee in bankruptcy, B circle means bankruptcy for the next few sections, or finally, a subsequent purchaser from debtor, all right? Let me show you this example.
All right, so they want to protect themselves from the debtor which means that you gave me the money or the credit to get the asset, you want to protect yourselves, if I don't pay you, you want to take it back. From other creditors, you loan me money to buy the TV, I no longer have the TV, but I have other assets or I have other creditors, well let's back up.