Previously we discussed the creation, perfection and enforcement of security interest in collateral. In this post we will consider when and how to terminate or extinguish security interest. We also look at the disadvantages to the lender of holding to security interest and collateral after full debt repayment.
When to terminate
After the borrow has pays the debt in full, the lender must terminate the security interest in collateral. This includes situations where the borrower defaults on the debt but agrees to pay the lender the full amount he owes. The amount factors in any expenses for taking, holding and preparing for the disposition of the property, including, if part of the security agreement, any legal expenses. Exercise of the right to terminate the security interest must occur before the lender disposes of or contracts to dispose of or accepts the property as full or partial settlement of debt. The lender effects termination by:
- Filing a termination statement
- Returning the pledged goods and documents to the borrower
- Returning the original security agreement
Disadvantages of holding on to collateral and security interest after debt repayment
If the lender preserves security interest after full repayment, the borrower may misconstrue it as his willingness to provide another loan. In addition, he has risk exposure from the unexpected liability if pledged goods or documents suffer damage while in their possession.
In this final post of the collateral valuation course we have looked at how security interest in collateral is terminated.