Edie needs $1,500 to buy textbooks and other school supplies. Frank agrees to loan Edie $1,500, accepting as collateral Edie's car. They put their agreement in writing and sign it. Edie keeps possession of the car. Does Frank have an enforceable security interest? How can Frank let other creditors know of his interest in the car?

Question

What will be an ideal response?

Answer 1

The three requirements for an enforceable security interest are a security agreement in writing (or the secured party's possession of the collateral), the creditor's giving something of value to the debtor, and the debtor's having rights in the collateral. Once these requirements are met, the interest attaches. A security interest is enforceable when attachment occurs. Here, assuming the agreement includes a reasonably identifying description of the car, these requirements are met. (The requirements for an effective, written security agreement are that it (1) be signed by the debtor, (2) contain a description of the collateral, and (3) the description must reasonably identify the collateral.) A creditor can put other creditors on notice by perfecting its interest. Perfecting is accomplished by filing a financing statement in the appropriate public office, or by taking possession of the collateral until the debtor repays the loan. In most states, filing is in a central office (of the state in which the debtor is located). For individual debtors, the place of filing is the state of the debtor's principal residence. (Filing is the most common means of perfection. Perfection of an interest in some types of collateral, such as negotiable instruments, can only be accomplished by taking possession of the property, but that is not the situation in this question, which involves a car as collateral that the debtor has retained.) Thus, Frank must file a financing statement. To be valid, a financing statement must include the names of the debtor and the creditor and describe the collateral covered by the security agreement. To avoid problems arising from different descriptions, a secured party can repeat the security agreement's description in the financing statement or file the two together. The filing may be accomplished by a paper filing or by an electronic filing.