One of the most important features of a secured transaction is the right of the secured party to enforce its security interest after the debtor’s default. The security interest is put in place to back up the obligation owed by the debtor to the secured party and is what gives the transaction its enforceability. Thus, the debtor will be working toward fulfillment of its obligation not just because of the fear of a breach of contract, but may also lose possession of some valuable piece of property.
Best Case: Security Interest is Never Enforced
Because it’s a headache for the creditor, most of the time the secured party wants the debtor to succeed and does not want to have to enforce the security interest by taking possession. In the best of cases the security interest is never actually enforced and the subject of repossession never enters either party’s mind. Accordingly, the event of default is a sign that something went seriously wrong and the secured party is left with no other alternative but to bring in the “muscle” of the contract.
While there is no exact definition of “default,” the UCC leaves to agreement of the parties the circumstances giving rise to the event of default. It is the written security agreement that spells out the terms and conditions of a default.
Thus, you should expect to find in some paragraph or section in the security agreement that lays out precisely what events will constitute defaults allowing the secured party to choose to exercise its rights and remedies. For example, one event that is expected to be on a basic list is the debtor’s failure to make good on its obligation.
However, this will rarely exhaust the possibilities as the agreement will typically set out a number of other conditions. So, even in the simplest agreement this list of events can be very long and confusing.
General Insecurity Clause
Although this list sometimes may seem like it covers every possible scenario, the agreement will often contain a “general insecurity clause” which allows the secured party to determine when the debtor is in default. These clauses are drafted into the agreement to cover unexpected situations that may occur in the course of a long term commercial relationship. Provided they are drafted in “good faith” and the secured doesn’t carelessly declare default, courts generally allow them.
Sometimes a party may not even be aware that he or she is in default which can cause major problems down the road. Thus, it is extremely important that you know and understand all the terms in you security agreement so you don’t end up losing possession of your property.
If you need help interpreting parts of a contract or have any questions regarding the default process, contact Roddy Lanigan and Eric Lanigan in Winter Park, Florida. We provide direction on asset protection having experience working with creditors for over 36 years.