LOAN MONEY THROUGH SECURED TRANSACTIONS: WHAT THE BANKS KNOW THAT YOU DON’T

Samantha M. Alecozay

July 24, 2026

Out of the kindness of your heart, you lend money to your Uncle Oscar a THIRD time. Then, after listening to your best friend’s presentation on opening an Irish/German fusion restaurant, you agree to help fund it as a “silent partner.” Question: how are these people paying you back? Did you have them sign something, and if so, did you include language that helps you if they don’t pay?

Often, people privately loan money without documenting the exchange (a major issue from a legal AND tax perspective). Moreover, many people assume that by having someone sign a simple loan document containing the amount lent and that the other side will be “in default” if they don’t pay, that’s somehow enough to protect themselves. Not even close!

Here’s the deal: there’s a reason the banks have more power than you when it comes to lending (beyond having exponentially more money to play with). They know HOW to lend money based on creditor-debtor laws and what rights they’re entitled to.

The question then is: how can you get some of the benefits and protections the banks get when you loan money to people? This blog covers some basic concepts and steps you can take to become what’s called a “secured creditor” and increase your chances of repayment!

Obviously, you cannot guarantee recovery by using these techniques permitted under the law, but you can at least increase your chances of getting value back if the other side stops paying.

Further, you should always talk to an attorney well-versed in commercial transactions first to navigate this space and draft documents before lending significant amounts of money (e.g., amounts over $30,000). There’s a reason this information is not common knowledge – even most attorneys struggle with this area of law![1]

What is a Secured Creditor?

To describe what a secured creditor is, we should first describe what it is NOT. Let's say someone owes you money and refuses to pay. You may be thinking, "No problem, I have a signed estimate for work (or even a loan document), so I'll just force them to pay." Unfortunately... that's not how it works. This likely makes you an UN-secured creditor.

As an unsecured creditor, you generally cannot just show up and take the debtor's property yourself. In fact, doing so could expose YOU to liability. Instead, your first step is usually to file a lawsuit (unless you already have a judgment), PROVE that you're owed the money, and obtain a judgment from the court. Worse yet, winning your case is only half the battle.

Once you have a judgment, you still have to take steps to try and collect. You’d think the judgment would be the last step, not so! Judgments simply prove that you’re owed money; judgments do not force anyone to actually pay up.

To actually ENFORCE a judgment, that often means asking the court to issue what’s called a writ of execution (based on information that you must provide to the court about the debtor), working with the sheriff or another authorized official to levy (to collect) on the debtor's non-exempt property, and then hoping the property seized is 1) actually the debtor’s property, and 2) worth enough to recover your debt. Sounds straightforward?

Speaking of “non-exempt property,” here's another problem: debtors don't always have collectible assets sitting around waiting for you. They may have already spent the money, transferred property to someone else, moved assets, or own property that's protected by state exemption laws.[2] Even if you know the debtor owns something valuable, you still have to locate it, determine whether it's legally collectible, and follow strict legal procedures before anyone can seize and sell it. All of this takes time, and time usually means major attorney's fees, court costs, and frustration.

To make matters worse, the collection process often depends on third parties. Sheriffs have statutory procedures they must follow along with limited resources, meaning enforcement may not happen as quickly as you'd like. By the time property is located or a levy is completed, the debtor may have already sold the asset, paid another creditor first, or filed for bankruptcy. In other words, obtaining a judgment does NOT guarantee that you'll ever see a single cent.

If you're considering lending a significant amount of money, don't wait until someone defaults to think about your legal rights. Structuring the transaction correctly before money changes hands can make the difference between having meaningful options for recovery and simply holding a piece of paper that says someone owes you money.

Hopefully, it’s clear that you don’t want to be an unsecured creditor – the banks avoid this position at all costs by becoming a secured creditor (and “perfecting” their interest…more on that in another blog). So, then what’s a secured creditor?!?

A SECURED creditor is a creditor who contracts for the right to repossess certain debtor property (i.e., “collateral”) if the debtor fails to meet their obligations. Specifically, a secured creditor has what’s called a “security interest” in property of the debtor, and a security interest is an interest in property contingent upon the non-payment of a debt. In simpler terms, with a security interest, if the debtor does not fulfill their obligations, a secured creditor can do things to the property the debtor put up as collateral.

Let’s look at an example:

Debbie goes to her friend Cathy. Debbie tells Cathy “I really need $40,000. Can I get a loan from you and pay you back overtime?”. Cathy has a few options here. Cathy could 1) tell Debbie to “kick rocks,” 2) offer Debbie the money through a promissory note that says, “I lent Debbie $40,000 and here’s how she has to pay me back,” OR 3) she could ask Debbie to put up property as “collateral” (e.g., electronics, equipment, etc.) and create what’s called a security agreement (in addition to the loan document). A security agreement creates a security interest in certain debtor property and makes Cathy a SECURED CREDITOR!

If Cathy chooses option 3), she’d reply “Of course, Debbie! I’ll loan you the money (with interest), but you’ll need to sign a loan document AND this contract that essentially says if you don’t pay me back properly, I can repossess (for example) your truck and nice watch that we will specifically list in the documents…”

In the example, if Debbie agrees to sign the security agreement, and Cathy lends $40,000, Cathy has likely “secured” her status as a secured creditor through creation of a security interest in the truck and watch! This means that if Debbie doesn’t fulfill her obligations (i.e., pay back Cathy), Cathy can do more than just cry to the courts just for the CHANCE to have property seized for value (if any exists) – Cathy can go after Debbie’s truck and watch as collateral!

It is important to note that there’s more than one way to “create” a security interest and make someone a secured creditor, but the example above is the clearest form. Further, a secured creditor may want to “perfect” the security interest for even more benefits (again, more on that another time…).

If you are dealing with a situation where you are unsure if a security interest was created or you lent money BEFORE knowing all of this, give us a call to see if we can help change your status!

Benefits of a Secured Transaction

Knowing that a secured creditor can likely repossess collateral when the debtor defaults is great, but now what? What are you supposed to do with it?

Depending on the type of property put up as collateral, and whether the debtor has filed for bankruptcy, creditors are able to either collect the collateral to sell it or accept it in satisfaction of the debt (or go through a judicial process to have the collateral sold for value).

Further, if the debtor decides to sell the collateral before paying off the debt (and without your permission or some other exception), you may be entitled to go after both the money/value the debtor earned from the sale AND the original collateral that’s now in the hands of another person!

(Some) Important Secured Transactions Rules

With great power comes great responsibility! Just because a secured creditor can repossess a debtor’s property upon default does NOT mean they can just go about it without following certain rules. There are numerous rules and pitfalls secured creditors must navigate, which is why you often don’t see individuals 1) know about the power of secured transactions or 2) wield said power properly.

For example, even when you’re permitted to personally repossess a debtor’s collateral, did you know that the debtor can cause a situation called “breach of the peace,” forcing you (or the repo agent you hired) to temporarily cease collection? It is not right of the debtor to cause such “public turbulence,” but if you fail to stop the repossession in time, you can actually be found liable for damages!

Further, even if you get possession of the collateral in a lawful manner, if you want to forgo selling the collateral (which also has specific requirements) because you are willing to accept the property in full or partial satisfaction of the debt, there are certain prohibitions on when you can do this as well as rules that must be followed before you finalize!

This is where you need an attorney knowledgeable in secured transactions to guide you through your options and properly set up your security agreement. Everyone should know about secured transactions and benefit from it, but it is important to know the risks involved. Further, becoming a secured creditor DOES NOT guarantee recovery, it just increases your chances of regaining value…

If you need legal guidance on lending money, consider Alecozay Law Firm, PLLC! Our attorneys will offer clear expectations, open communication, and, if a relationship is formed, quality legal services. Please feel free to contact us to schedule a free consultation! You can schedule an appointment via email at joel.s@alecozaylaw.com or by phone at 210-774-2741 during standard office hours.

We look forward to hearing from you!

[1] This area of law is called “secured transactions,” a notoriously difficult subject that many law students and attorneys struggle with.

[2] There are laws against “voidable transfers” in these situations, but they are difficult to enforce and often not worth time pursuing financially.