In this video, 20.01 – Secured Transactions – Lesson 1, Roger Philipp, CPA, CGMA, discusses the three ways a creditor can protect its claims against a borrower: by obtaining a security interest called collateral, by providing a guarantor, or by bankrupting the debtor and hoping to get paid as a perfect secured creditor or general unsecured creditor.

Secured transactions involving tangible and personal property, as covered by Article 9 of the Universal Commercial Code, are the subject of this lesson. Roger distinguishes between money borrowed to purchase inventory, to purchase equipment, and to purchase consumer goods, and explains that a television could be either of these two categories, depending on the borrower. Roger builds on previous learning on this topic by relating these categories to ordinary assets, Section 1231 assets, and capital assets. All of these categories—inventory, equipment, and consumer goods—can be types of collateral. We learn that when the creditor loans the debtor money to purchase an asset, that asset legally becomes the collateral.

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Preview the video transcript:

Welcome, welcome, let's talk about a fun and exciting area called secure transactions. A lot of the topics we're going to cover affect both the creditor and the debtor. So let's say, for example, I lend you money, right? I lend you money, I'm going to protect my interests. There are three different ways I can protect myself and get my money back, which we'll look at in the next few chapters.

So I lend you money. One way is I take an asset as collateral; I secure the transaction. That's what this chapter is about. Another way is I lend you money but get a guarantor as a co-signer, called a surety bond. The third, least desirable way is I bankrupt you and hopefully get paid either as a perfectly secured creditor or as a general unsecured creditor. So again, I lend you money, three ways to protect myself.

The creditor's goal is to get the money back, to collect it. How do I do that? One way is to secure the transaction with collateral. That way, you don't pay me, I'll take your house, I'll take your car, I'll take your kids, I'll take your dog and I'll eat it. Another way is to get a guarantor as a co-signer. The third and least desirable way is to force you into bankruptcy, Chapter 7, 11, 13, which we'll talk about in another section.

This section starts with secure transactions, which are covered in UCC Article 9. So this is called secure transactions, UCC Article 9. So what we're doing is essentially this: here's the creditor, the creditor is either going to lend you money or extend credit to you to the debtor. What we're going to do is I'm going to lend you money and in return I'm going to get a security interest in your property, which we call collateral. Collateral damage, right? So I'm going to lend you money and I'm going to say, here's 100,000, what can you give me as collateral? I could take your car, I could take your jewelry, I could take a promissory note, and I could take all these different things.

Now we're looking at maybe I lend you money to buy inventory. Maybe I lend you money to buy equipment. Maybe I lend you money to buy consumer goods. So we're all trying to figure out what you're giving me as collateral. So again, I lend you money, three different ways to hedge. I take something as collateral, I hedge the transactions, but this section only deals with what? Personal property, tangible personal property.

Remember in the land and real estate section we talked about mortgages? A mortgage is when the bank lends you money and takes your house, your real estate, as collateral, so it's a mortgage. We're not talking about real estate here, we're talking about personal property, tangible personal property. That's what this section is about.

The other thing is: I loan you money, I have someone co-sign, and if you don't pay, I take it from them, that's called a surety bond, and if you don't pay something later, that forces you into bankruptcy. So that's what we're looking at in this section. It says UCC Article 9, property, it includes personal property or furnishings, not real estate. Now let's talk about the types of collateral.

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