Everyone wants to feel safe.

All Eliza Dolittle wanted was a room somewhere out of the cold night air, and one large chair.

Most of us want more. Especially when it’s our money on the line.

Safety can mean different things to different people. But when it comes to the law, safety has a special meaning.

In simple terms, security interests refer to the legal right that creditors and lenders have over the property or assets of a borrower. This right acts as collateral and provides assurance that lenders can recover their funds in the event of default or non-payment. It gives lenders a first claim to certain assets, allowing them to seize and sell them to collect a debt owed to them.

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Let’s look at a fairly common example.

Let’s say that even in this crazy real estate market, you want to buy a house. Let’s say, what’s even crazier, is that you might qualify for it. You’ve been saving and saving, and now you see how much your savings have grown. You go to the lender and say, “If I put down my savings—20 percent of the purchase price—will you put down the rest?”

The potential lender ponders. “Well, yes,” he might say. “As long as you meet our devastating and overwhelming criteria, jump through a few hoops, pledge your firstborn child, and… provide sufficient collateral.”

“What are you saying?”

What the lender is saying when they bring up the issue of security is that they don’t want to take any risk. Sure, they’ll lend you the money, but only (if you turn out to be ineligible or unable to repay the money) can they stick their necks in the house, sell it, and get back what they have in it.

This is what—despite Eliza Doolittle—safety is all about.

The bank or other lender will require legal instruments giving it the right to recoup its investment by seizing the property and selling the asset (in this case the home) to ensure it does not suffer a loss.

That said, in a market that turns, there is a risk of loss. Let’s say you buy your dream home for a cool million dollars. The banks lend you $800,000 to make your dream come true. Both your personal situation and the market crash. You can’t repay the debt, and the home, once worth six zeros, is worth half that. What’s a lender to do?

They will likely sell the house, get what they can, and gesticulate, threaten, scratch, and sue in hopes of recovering the rest. Still, even if these circumstances are unpleasant for anyone, the lender’s security in the home provides at least some buffer against risk.

In many cases, security interests are created through agreements such as mortgages (as in the example above), vehicle loans, or business financing agreements. These agreements ensure that the lender’s interest in the property is registered through the proper channels, such as filing a financing statement with the appropriate government office. This registration helps protect the lender’s interest and serves as notice to other potential creditors both of the existence of the debt and of the lender’s priority of recovery if things go wrong one day.

Almost always, a secured right requires a written document that memorializes the agreement and details the “what ifs.” Another important thing is a clear description of the assets to be secured; is it this house and not that house, the Porsche and not the Chevy Volt? Finally, you can’t just inadvertently take someone else’s property; consent is an absolute requirement.

What about the other part, unsecured debt?

We see this all the time in law. One party lends money to another in exchange for the borrower’s execution of a bill of exchange. Now, bills of exchange can be secured or unsecured, but in the latter circumstance, where there is no security provided, the bill of exchange is little more than a promise to pay. While still enforceable, if the bill of exchange is breached, you lose the leverage of an asset to act upon.

One last thing: The security offered in exchange for the funds provided or the financing agreement can be almost as diverse as the imagination: real estate, vehicles, investment portfolio, equipment, and accounts receivable. At the end of the day, this is retaliation; I will lend you the money as long as you agree to pay me on those terms, and if you don’t, I will demand what you promised to make me do so.

Lots of chocolates for me to eat,
A lot of coal produces a lot of heat.
Warm face, warm hands, warm feet.

Yes, that’s great. But when it comes to our hard-earned cash, most of us — especially those in suits — demand more.

Rohn K. Robbins is a licensed attorney in the Colorado and California Bar Associations who practices in the Vail Valley at Caplan & Earnest, LLC. His practice areas include business and commercial transactions; real estate and development; family law, custody and divorce; and civil litigation. Robbins can be reached at 970-926-4461 or [email protected]. His novels How to Raise a Shark (an apocryphal tale), The Stone Minder’s Daughter, Why I Walk so Slow, and He Said They Came From Mars (stories from the edge of the legal universe) are currently available in good bookstores. Coming soon is The Theory of Dancing Mice.