Secure or be Sorry

Iowa Code Chapter 554, Iowa Uniform Commercial Code (the “UCC”), is one of the more daunting and confusing chapters in the Iowa Code.

A whole 267 pages to be exact. However, if you have provided, or plan to provide any type of loan it may be worth attempting to secure your loan. Whether you are worried or not about their ability to pay it back, if the individual who you loan money to goes into bankruptcy, and you as the lender fail in adhering to proper UCC procedures, any agreement you had for repayment is probably as good as the paper it is (hopefully) written on.

There are MANY ways of securing a loan, and there are many ways of making a mistake. It is emphasized that loans and collateralization is a convoluted knot of issues undone by painstakingly detail oriented research. So, beware. This is an area where it is a very good idea to spent the time and talk with a qualified attorney. However, below is the typical process of documentation for collateralizing a loan transaction.

The individual receiving the loan (the “debtor”) must sign what is called a “Security Agreement.” This agreement provides evidence the debtor acknowledges and accepts that you (the “creditor”) have rights to the collateral described in the agreement. The description of the collateral is a sticky point, so be sure to define what is secured sufficiently.

(Wait, what is collateral? Collateral is a pledge offered as security for a loan. As an example, if you loan your friend $8,000 dollars to purchase a car, the car itself would be the collateral.)

Next (and technically could be done prior to the signing of the Security Agreement, herein lays just one of the complexity of secured transactions!), you should file what is called a UCC-1 Financing Statement with the Secretary of State. This is a standard form filed with the appropriate county office to put all others on notice YOU have rights to collateral mentioned in the Financing Statement. And again, make sure you describe the collateral sufficiently!

Lastly is an issue of priority of the secured property. The UCC operates on a “first to file or perfect,” which is a bit of legal jargon; however, one should always file their UCC-2 Financing Statement ASAP!  

However, this again is something to be discussed with a qualified attorney. For more information, contact our Sioux City law firm, Sioux Falls law firm, or Omaha law firm today!