Creation and Perfection of a Security Interest
When a creditor lends a certain sum of money or assets to a debtor, they require a certain level of assurance that their investment will be returned. At the same time, there is always a danger of the debtor defaulting, refusing to uphold their obligation, or otherwise being unable to pay back. In such a case, it becomes necessary for the creditor to use their collateral. However, even in the case of using a debtor’s assets as collateral, it is necessary to assess whether the value of the collateral is satisfactory and whether an individual has a right to use it over other creditors. According to the book Business Law: Text and Cases (Clarkson et al., 2016), all of these needs can be fulfilled by creating and perfecting a security interest. A security interest is established through a security agreement, allowing a creditor to receive security on a particular collateral subject. Said document must describe the collateral subject in a way that makes it identifiable and be authenticated.
Once the particular details of an agreement are decided, it comes into power and becomes a legal document. Aside from the process of creating a security agreement, which gives a creditor legal rights to collateral in cases of unsuccessful payment, it is also necessary to perfect a security interest. Perfection refers to additional legal stipulations which allow a creditor to be protected against other third parties assessing collateral. Perfecting security gives a creditor priority over others, ensuring that they are able to receive compensation. One way to perfect a security interest is by filing an additional financing statement in person or electronically.
When consulting the Your Guide to Secured Transactions Filings in Ohio guide, I found some of the information inside to be useful. The first thing that stood out to me is the process of amending financing statements. Any given financing statement does not last indefinitely, making the perfected security interest lose its power (“Your Guide to Secured Transactions Filings in Ohio,” n.d.). Therefore, it is necessary to extend the duration of a financing statement. For this purpose, it is possible to create a continuation statement. Usually, a statement last for five years, however, it is possible to file a continuation statement within the last six months of one’s financing statement. I think the most important piece of information for me is the timeframe required to file a continuation statement. Another interesting addition to discussions of changing financing statements concerns the collateral itself.
As the guide discusses, sometimes it may be necessary or desired to remove some subject from the collateral, change its description or restate the collateral entirely. In order to do that, it is necessary to file for a financing statement amendment, which will change the description of the collateral in the aforementioned manner. However, if the stated collateral increases due to changes in the party’s agreement, it will be necessary to further change the financing statement amendment (“Your Guide to Secured Transactions Filings in Ohio,” n.d.). I think this information may become useful to me, as it more accurately describes the smaller details of working with collateral subjects, the process of creating agreements and perfecting one’s security interest. In order to protect my potential loans and ensure that any debtors will be capable of paying me back, I find it necessary to accurately understand how the process of perfecting an interest works.
Clarkson, K. W., Miller, R. L., & Cross, F. B. (2016). Business law: Text and cases. Cengage Learning.
Your Guide to Secured Transactions Filings in Ohio. (n.d.). Ohio Secretary of State. Web.