A chattel paper is a document which contains information about a monetary obligation paired with the specifics of a security interest held by the creditor. This security interest is usually a lien on a piece of movable property. Chattel papers are used in a wide variety of settings. As with any legal document which contains information about debts and liens, a chattel paper should be carefully reviewed by both parties to confirm that it contains accurate information.
In a simple example of a setting in which a chattel paper might be used, an equipment rental company could rent equipment to a business, and retain a lien on the equipment. In the event that the business failed to make their lease payments, the equipment rental company could take the equipment back. Likewise, when goods are sold on credit, a chattel paper can be written up to give the seller the right to seize the goods in the event that the debt obligation is not met.
Using a chattel paper turns the creditor into a secured creditor. Being a secured creditor can be important if someone goes bankrupt, because secured creditors have first right to any assets. When a business fails or someone files bankruptcy, the secured creditors are first in line to retrieve items they hold liens on and to recover their debt. By contrast, unsecured creditors must wait, and hope that there will be something left to cover the debts owed to them.
If someone wishes to sell or transfer something which is named as a security interest by a creditor, the permission of the creditor must be obtained for the sale or transfer to go through. In a simple example, someone who is paying off a car loan needs the permission of the bank to sell the car, and must generally meet requirements such as selling the car at a price sufficient to pay the loan off. Purchasers need to be wary when buying something which is named in a chattel paper, and should take the time to confirm that the sale is allowable and that the lien will be lifted, or transferred by arrangement if they wish to take on the debt obligation.
Once the debt obligation is satisfied, it is important to make sure that the lien is lifted. In the car example above, if someone has paid off a car loan, the car's title should be modified to remove the name of the lender. Otherwise, the lender still has a security interest in the vehicle, and could potentially seize it even though the debt has been satisfied.