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What is a security interest?

A security interest is when the creditor has legal claim or a lien on collateral that has been pledged by the debtor to obtain a loan. This provides tangible value that the creditor can seize and sell to pay off the loan if the debtor defaults.

In order for a security interest to be legally valid, the Uniform Commercial Code (“UCC”) specifies three requirements. The three requirements are known as attachment:

1) An agreement must be made: An agreement may be evidenced by authenticated record (in the form of a written contract) or by taking possession of the security interest.

2) Something that has measurable value must be exchanged: Basically, the collateral that has been pledged by the principal debtor must have definitive value. As you can see in example #1, Jenny is pledging her car, which has value. However, in example #2, Jenny cannot pledge her sense of humor as that would not have tangible value:

3) The debtor must have rights to the collateral: Basically, the debtor needs to have legal ownership of the collateral. The debtor cannot pledge an item that they do now legally own.

Assuming that all three criteria set forth by the UCC are in place, then a writ of attachment will be issued:

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