Security is a concept in commercial law where a lender has remedies against a piece of property when a loan is in default. A creditor with security in property does, in most cases, assert their rights against anyone who comes into possession of the property for any reason. In common law systems, the classic form of security is the mortgage, although many other forms of security exist at common law, and have been created by statute. In civil code systems, the classic form of security is the hypotec.
In most cases, the borrower keeps physical posession or use of the property during the term of the loan. However, there are forms of security, such as a pawn, where the lender keeps possession of the property.
There can be more than one security interest in any given piece of property. As a general rule, the earliest security interest takes precedence over later security interests. In all cases, a creditor with a security interest in a piece of property has precedence over other creditors who hold no security interest in the property.
For example, a person may take out a first mortgage and a second mortgage on their house, and then run up a credit card bill. If the person defaults and the house is sold, the first mortgage holder gets all the proceeds until it's mortgage is satisfied. Any remaining proceeds go to fully satisfy the second mortage holder. Anything left goes to the credit card company.
As a rule, security interests survive bankruptcy, although in modern practice, a bankruptcy will allow a debtor to re-negotiate some of their secured loans.
In order to facilitate lending and commerce, security interests must be known to potential lenders, as it would be foolish to advance funds backed by security in property that has already been pledged. As such, depending on the type of security and the jurisdiction, there are two general systems for advertising security interests:
- Notice based, where the security interest is publicized in some form.
- Registration based, where the existence of the security interest is stored in some sort of central registry.
In both systems, security must be perfected before it can be asserted against another secured creditor (although the existence of the security can always be asserted against both the borrower and unsecured creditors, even if it has not been perfected). If a security interest is not perfected, a subsequent security holder who perfects first may get priority even though they do not hold the senior security interest.