A secured debt is an obligation to pay money that is guaranteed by either the debtor’s pledge or by operation of law to surrender specified property (known as “collateral”) in the event of non-payment. A perfected security interest can be discharged in bankruptcy, but the debtor must surrender the collateral.
The five most common types of security interests are perfected interest, purchase money security interest (PMSI), non-PMSI, judicial lien and tax lien. This article discusses perfected security interest.
A perfected security interest is a lien placed on the debtor’s property with the debtor’s written consent. A lien is only valid if it has been “perfected,” meaning that it has been properly recorded in accordance with a law commonly referred to as Article 9 of the Uniform Commercial Code.
The most obvious examples of perfected interests are (a) home mortgages recorded in the Official Records of the county in which the home is located and (b) the actual appearance of a lien holder’s name on your car title. If the creditor fails to properly record the security interest, it is not perfected, and the debt is unsecured.
As incredible as it may seem, your bank may actually forget to record your mortgage. I know this can happen because it happened to me. In 2003, I sold my home, and in the process, I learned that GMAC failed to record the refinance mortgage I had executed in 2000. At the closing of the sale on my home, the seller’s finance company literally handed me a check for the entire purchase price. Oh, how tempting that was!
I did send GMAC a check for the payoff on the note, and weeks later, GMAC voluntarily refunded the recording fees I had been required to pay years earlier. Even though GMAC may have had an “equitable mortgage,” it would have been “wiped out” by the sale of my home. This could have been a nightmare for GMAC!
Stay tuned for posts on other types secured debts . . .