Sometimes a creditor may want to retain the collateral instead of selling it and extracting the value to satisfy the debt. However, this process is quite uncommon (most creditors would rather have the money and obligation satisfied). There are several rules depending on whether the creditor wants to satisfy the whole debt or only a partially satisfy the debt.
See 9-620 through 9-622.
Acceptance to Satisfy the Debt in Full
If a creditor wishes to accept collateral to satisfy debt, they must obtain the consent of the debtor. As such, the creditor is required to send the debtor a proposal which will outline that the creditor wishes to accept the collateral to satisfy the entirety of the debt.
In this situation, the debtor does not need to send an authenticated consent form for the proposal to take effect. If the debtor fails to make a timely objection, the proposal can be seen as accepted. As such, creditors often include a date by which the proposal will become effective and failure to object before that date will result in an effective agreement.
In the proposal, creditors will also say that the proceeds are to be included as acceptance. That way, the debtor is unable to extract the value before the proposal goes into effect and leave the creditor with valueless collateral.
Acceptance to Partially Satisfy the Debt
The main difference between acceptance to fully satisfy the debt and partially satisfy the debt is the manner of consent. Acceptance to partially satisfy a debt requires an authenticated consent of the proposal by the debtor.
Failure to obtain consent will require the creditor to follow the regular foreclosure procedures.
Other things to Note
- A creditor can hold onto the collateral for a long time and it will not be considered as accepted until a proposal is sent out.
- Acceptance of the collateral by a junior secured party does not diminish the rights of a senior secured party. That is, the collateral is still utilized to secure the senior party’s interest.
- No notice is required to be provided to secondary obligors.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
