What is Chattel Paper?
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.
The chattel paper I'm most familiar with is the one that you should always go over before moving into a furnished apartment. Otherwise, the landlord can claim that you've damaged or removed items later on.
Just before moving in, I go over it with him or her, noting the condition of things like curtains and any white ware and sometimes even things like carpets or heating units. Then we both sign it and as long as I don't damage anything, I don't have to worry about it from then on.
Essentially, you're renting the appliances and curtains and things from the landlord, as well as the property and it's important to make that clear from both sides so that you can keep yourself safe from legal and financial trouble.
I saw this recently on a TV show about people being ripped off, where a company was offering to sell large items like motorbikes on behalf of others and they went bankrupt.
When they went bankrupt, it turned out that they had put up all their assets, including all the items they were holding for others, waiting for sale, as chattel and so the people who had given them these items in trust, basically lost them without compensation.
It was really quite sad, as there are plenty of people who can't really afford to swallow the cost of an entire motorbike, but it was all perfectly legal and there was nothing they could really do. They couldn't even sue the company, since there was no point- they'd already gone bankrupt.
So, be careful if you enter into an agreement like this, where a company is supposed to sell something on your behalf. Make sure that you won't lose it entirely.
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