Secured debt is that category of debt in which a creditor has been granted a portion of the bundle of rights to specified property. The opposite of secured debt is unsecured debt, which is not connected to any specific piece of property. The purpose of securing debt is to allow the creditor to take the property in the event that the debt is not properly repaid, with the underlying belief that permitting this course of action allows debtors to get loans on more favorable terms than that available for unsecured debt, or to be extended credit under circumstances when credit under terms of unsecured debt would not be extended at all.
In the case of real estate, the most common form of secured debt is the lien. Liens may either be voluntarily created, as with a mortgage, or involuntarily created, such as a mechanics lien. A mortgage may only be created with the express consent of the title owner, without regard to other facts of the situation. In contrast, the primary condition required to create a mechanics lien is that real estate is somehow improved through the work or materials provided by the person filing a mechanics lien. Although the rules are complex, consent of the title owner to the mechanics lien itself is not required.
In the case of personal property, the most common procedure for securing the debt is described through the Uniform Commercial Code or UCC. This statute provides a system of forms and public filing of documents by which the creditor's interest in the property is made known.
In the event that the underlying debt is not properly paid, the creditor may decide to foreclose the interest in order to take the property. Generally, the law that allows the secured debt to be made also provides a procedure whereby the property will be sold at public auction, or through some other means of sale. The law commonly also provides a right of redemption, whereby a debtor may arrange for late payment of the debt but keep the property.
Where A is owed a debt or other obligation by B, A may require B to deliver property rights in securities to A. These property rights enable A to satisfy its claims in the event that B becomes insolvent.
The holder of a debtsecurity is owed a debt by the issuer and is entitled to the payment of principal and interest, together with other personal rights under the terms of the issue, such as the right to receive certain information.
Debtsecurities are generally issued for a fixed term and redeemable by the issuer at the end of that term.
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