In this video, 20.02 – Secured Transactions – Lesson 3, Roger Philipp, CPA, CGMA teaches that by obtaining a security interest, a creditor protects itself from DOTS – the debtor, other creditors, a bankruptcy trustee, and any subsequent purchaser of the debtor who is unaware of the completion.

To protect themselves from the debtor, the creditor simply has to foreclose. To protect themselves from third parties, the creditor must foreclose and perfect the security interest. In this lesson, Roger describes and explains the three conditions that must be met for a security interest to be foreclosed. These three conditions are: the debtor must have rights to the asset pledged as collateral for the loan; a claim must be created (either through a signed security agreement or by taking possession of the asset) and value must have been attributed to the debtor.

Roger reads an old credit card purchase receipt, which, together with the cardholder agreement, allows the creditor to seize its security interest in the goods purchased by the debtor with the credit card. The credit card receipt refers to the General Commercial Code, Article 9 of which regulates secured transactions, and uses the term PMSI – Purchase Money Security Agreement – to describe it.

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Preview the video transcript:

Okay, moving on to secured transactions. We're going to secure the transaction. Now what do we need to do, as we just said? Pin and perfect. To protect myself, the debtor, I need to pin. To protect myself from others, I need to pin and perfect. What we need to do is learn what pinning and perfection is. Let's write this on the board here and see what it means.

To begin with, it's about attachment versus perfection. Perfection, or attachment, means that we attach to all three things when they happen. For perfection, you need one of the three things.

Okay, so here we go. To do a garnishment, you'll see this in your notes. The property has to belong to the debtor. The property is the debtor's property, the debtor's property. Basically that means they have rights to it, whatever it is. Whatever they give you is collateral, they have to have rights to it. Does it belong to them and so on. It says here that this can include ownership of the collateral or other claims like a royalty right, but basically what they're pledging is collateral for the loan, they have to have rights to it.

Second, we need to create interest. Interest is creative. There are two ways to create interest: either you actually go and actually take possession of the item. Either you take possession of the item, which does happen but not often, because taking possession would be like going somewhere and putting something aside, for example. You keep it, you have ownership of it. You go to a pawn shop and give it to them. You take it, they have ownership of it.

The other thing that's being looked at a lot more now is a signed security agreement, a signed security agreement. Notice this is this signed security agreement. Now what is a signed security agreement? It would be an agreement that contains a description of the asset and is signed by the debtor, the person who is giving up their rights. It's signed by the debtor and it contains a reasonable description of the collateral.

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