In what circumstance is getting a security interestregarding a loan advisable?

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In what circumstance is getting a security interestregarding a loan advisable?

We loaned a family member $20,000 to save his house from foreclosure and to do some repairs so that he could sell it. The only way he can repay the loan is to sell the house and pay us back with the proceeds (which is fine with us). He agreed to sign a promissory note, but we’re not sure if we should secure the note to the property. He has thousands of dollars in unsecured debt already and we want to do everything that we can to make sure other creditors don’t get all the money from the sale of the house, but we don’t want to accidentally prevent him from selling the house. What should we do?

Asked on December 19, 2010 under Bankruptcy Law, California

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

Your family member is, no offense, a bad credit risk: he has thousands of dollars of unpaid debt, he was defaulting on his mortgage, etc. Ideally, you should not have loaned him the money. Since you did, you should definitely get security if you can. Any property can serve as security, so you could have him draft an agreement giving you a security interest in a car, a motorcycle, a boat, an ATV, a plasma TV, etc.--including in any combination of items adding up to more-or-less the amount of security you are looking for. Similarly, if he owns any stocks or bonds, those could become the basis for a security interest. If he has a spouse or significant other, you might also see if that person would guarantee repayment.


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