Chattel paper: Overview, definition, and example
What is chattel paper?
Chattel paper is a legal term used to describe a type of written document that represents both a monetary obligation and a security interest in personal property. It typically involves a contract or lease agreement where the borrower or lessee is obligated to make payments, and the secured party has a claim or lien on the specific personal property being financed or leased. Chattel paper can be used in transactions involving movable goods, such as cars, equipment, or machinery, and it serves as evidence of both the obligation to pay and the security interest in the underlying property.
For example, when a person finances a car purchase, the financing agreement and the car itself (as the collateral) would constitute chattel paper, as it represents both the buyer’s obligation to pay and the lender’s security interest in the car.
Why is chattel paper important?
Chattel paper is important because it allows businesses and financial institutions to document and secure transactions involving personal property. It provides clarity regarding the rights of the lender or lessor over the collateral and helps enforce payment obligations. In financing and leasing transactions, chattel paper acts as both a receipt for the transaction and a legal instrument that protects the interests of the party holding the security interest. For creditors, chattel paper can be sold or assigned, providing liquidity, and it can also be used as collateral in future financing arrangements.
Understanding chattel paper through an example
Let’s say a company provides equipment financing to a customer who is purchasing a new printing press. The financing agreement, which outlines the payment schedule, as well as the printing press itself (which serves as collateral), constitutes chattel paper. If the customer defaults on the payments, the company holding the chattel paper has the right to repossess the printing press to satisfy the debt.
In another example, a car dealership finances the sale of a car to a customer. The car loan agreement, which includes the customer’s obligation to repay the loan and the car itself as collateral, creates chattel paper. If the customer fails to make payments, the lender can use the chattel paper to repossess the car and sell it to recover the loan balance.
An example of a chattel paper clause
Here’s how a chattel paper clause might appear in a financing agreement:
“The Borrower acknowledges that this Agreement constitutes chattel paper, and the Lender has a security interest in the property described herein as collateral. The Borrower agrees to make payments as outlined in this Agreement and understands that the Lender may take possession of the collateral if the Borrower defaults.”
Conclusion
Chattel paper is a crucial tool in financing and leasing transactions involving personal property, as it provides both evidence of a borrower’s obligation to pay and a secured party’s interest in the underlying asset. By creating a legal framework for transactions, chattel paper protects the rights of creditors and helps facilitate the efficient transfer and enforcement of financing arrangements. Whether used in the sale of equipment, vehicles, or other tangible goods, chattel paper ensures clarity and security for both parties in the transaction.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.