How is a security interest created and how is it perfected? Provide an example. If you are the creditor, what is difference between having a perfected security interest and an unperfected interest? What is a “reorganization” bankruptcy and how is it different than an “ordinary” bankruptcy? Give examples of each.
In a bankruptcy, what rights do secured creditors have over unsecured creditors, and why?
Answer preview
A security interest is created when a creditor acquires a legal right to hold a debtor’s collateral if the debtor fails to pay the debt. The conditions for security interest attachment are: authentic security agreement, the attached value and the debtor’s right to transfer the security to the secured party. The perfection of security means that only the creditor claims the collateral in case the debtor becomes bankrupt. Perfecting the security can be done by possessing or controlling the collateral by the creditor, filing a financial statement, and securing the collateral automatically upon attachment (Olivares-Caminal, 2018). For example, Marks borrows 20,000, dollars from a bank to buy a car, and then later, he is unable to pay a loan balance of $15,000. The bank possesses a right to repossess the vehicle and sell it to settle the balance of $15,000. For a creditor, perfected security ensures more legal right and priority over the collateral if the debtor is insolvent.
