When considering a new loan, the debtors and the creditors should know the difference between secured and unsecured transactions. These transactions will determine whether the creditor gets protection or the debtor gets the upper hand. A business lawyer can help navigate through the process to make sure the loan is the right choice for both parties.
What is a Secured Transaction?
A secured transaction is a transaction where a security interest exists for the creditor or lender, which is collateral that guarantees a loan will be paid. When the debtor defaults on payments, the lender can sell the collateral to recover the debt.
Examples of secured transactions are car loans or mortgage loans. The vehicle becomes the collateral when the buyer takes out a loan to purchase the car. The creditor can repossess and sell the car if the buyer cannot make payments. This is the same case for a mortgage loan. The lender forecloses and sells the home when the debtor can no longer make mortgage payments.
For businesses, a secured transaction can happen when a lender offers a loan to the company to purchase equipment or commercial property. Therefore, the property is collateral if the business defaults on payments.
A secured transaction can protect the creditor but can potentially create risk for the borrower. The rules under Article 9 of the Uniform Commercial Code ensure the creditor’s rights and also that the creditor’s claims take priority over third-party claims.
Secured transactions should always be in writing, and with a qualified business lawyer, both parties can be informed of their rights and the risks involved.
What is an Unsecured Transaction?
An unsecured transaction is a transaction where the lender or creditor does not hold a lien on the debtor’s property, and instead, they focus on debt collection when the buyer defaults on payments. The creditor does not get protection in an unsecured transaction; before taking legal action, the creditor can only rely on voluntary repayment from the debtor.
Unsecured transactions include credit card issuers, utility companies, cash advance companies, and landlords. Generally, the creditor will attempt to collect the debt through direct contact and report it to the credit bureaus, Equifax, Experian, and TransUnion. The creditor may also choose to sell the debt to a collection agency.
If the creditor has failed to collect the debt through several attempts, they must sue, win a judgment against the debtor, and begin bankruptcy proceedings. The creditor should also file a complaint in court before they pursue wage garnishment and liquidation as means to recover the debt.
Our Business Lawyers Can Help You
At Johnson May, we can assist you with secured and unsecured transactions, whether you are a lender or borrower. We know the high stakes regarding expensive personal property and the litigation proceedings that could be needed in collecting the debt. Contact our business law firm today for assistance.