Security Interests

AuthorRobert Chambers
As discus sed in Chapter 1, debt is a relationship in which the debtor has
an obligation to pay money to the creditor, who holds the corresponding
right to be paid. The value of that right depends on the likelihood that
the debtor will perform thei r obligation. If the debtor fails to pay, the
creditor can take steps to enforce their right, f‌irst by going to court to
get a judgment (and thus becoming a judgment creditor) and then by
engaging the civil en forcement process to seize the debtor’s assets (as
an execution creditor). This can be slow, expensive, and disappointing.
If the debtor is unable to pay their debts, they m ay be bankrupt, in
which case the creditor is not allowed to enforce their right against the
deb tor.1 The creditor’s only remedy is to make a cla im in the bankruptcy.
The debtor’s trustee in bankruptcy will use the debtor’s assets to ra ise
money to pay the creditors, who hope to receive some portion of the
money that is owed to them, after which tho se debts will be exting uished.2
A creditor can reduce the risk of non-payment by taking a security
interest (and becoming a secu red credi tor). A security interest is a right
in rem that exists for the purpose of making it more likely that a debt
will be paid. Other personal obligations can be secured, but debt is by
far the most common.
1 Bankruptcy an d Insolvency Act, RSC 1985, c B-3, s 69.3.
2 Ibid, s 178(2).
Security Interests 103
Security intere sts take many dierent forms but share two common
traits: they are propert y rights to one or more of the debtor’s assets, and
they exist for the limited purpose of securing pay ment of a debt (or
some other personal obligation). The security interest with which most
people are familiar i s a mortgage of a home to secure the homeowner’s
obligation to pay back the money they borrowed in order to buy it. Once
that obligation is performed, the mortgage ha s fulf‌illed its purpose, and
the homeowner is entitled to have it discharged.
A secured creditor has sever al advantages over an unsecu red creditor.
If the debtor fails to pay, the secured creditor does not have to go
through the process of becoming an execution creditor but can enforce
their security a nd use the assets subject to their security interest to
satisfy the debt. If the debtor becomes bankrupt, the secured as sets
cannot be used by the t rustee in bankr uptcy to pay the other creditors
until the secured creditor has received what they are owed. The sec-
urity interest al so provides the debtor with an additional i ncentive to
pay that debt. For example, if money is tight at the end of the month,
most people will choose to make their mortgage payment before they
pay their credit card debt. The consequences of failing to pay a secured
debt are more severe.
Although security is de signed to protect the creditor, it has an advan-
tage for the debtor as well. The cost of borrowing is reduced if the debtor
can oer security for the debt because i nterest rates ref‌lect the risk taken
by the creditor. For example, in 2020, typical mortgage interest rates in
British Columbia were 3.5 percent, whereas interest on credit card debt
was 20 percent (and interest on a “payday” loan was 400 p ercent).
This chapter looks f‌irst at the main forms of security. The com-
mon law provided two options: the creditor could take possession of
the debtor’s land or goods or take legal title to them. Equity al lowed
the creditor to have an encumbrance on the debtor’s assets, which was
neither possession nor legal title. That is now al so possible by statute.
This chapter then looks at mortgages of land and f‌i nishes with personal
property security.
1) Pawn or Pledge
The oldest form of security is called a pawn or pledge, in which the
debtor transfers posses sion of goods or documents to the creditor to
hold until the debt is repaid. It is simple and eective but has two m ain

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