When a person or business borrows money, or purchases or leases goods on credit (without paying the full purchase price up-front), the credit extended to the borrower (1) may be secured/collateralized by money or other assets, or (2) may be unsecured. For example, if your business takes out a loan from the bank, the bank will likely require you to pledge certain assets as security or collateral for the loan—and if you default on the loan, the bank may use the legal process (attachment, repossession) to gain ownership of those pledged assets to satisfy the debt.

Other transactions in which a creditor extends credit to your business may be unsecured—such as the bank that issues your business credit card without requiring you to pledge specific assets as collateral in case you fail to make the payments. But even an unsecured creditor can file a lawsuit against you or use other means to collect the debt you agreed to repay. The law of secured transactions is generally governed by the uniform commercial code (UCC), which has been adopted and made the law in some form in most states.

In North Carolina, as in most states, the law of secured transactions is governed by Article 9 of the Uniform Commercial Code (UCC), which has been adopted into state law. When a business or individual borrows money or obtains goods on credit, the creditor may require collateral to secure the debt. This means that the borrower pledges assets, which could be repossessed or foreclosed upon in case of default. Secured transactions are typically accompanied by a security agreement and a financing statement (UCC-1) that is filed to perfect the security interest, giving the creditor priority over other claimants to the collateral. On the other hand, unsecured credit does not involve specific collateral. Creditors of unsecured debt may still pursue repayment through legal means such as lawsuits, but they do not have priority over secured creditors and cannot claim specific pledged assets without a court judgment. It is important for businesses to understand the implications of secured versus unsecured credit, as the rights and remedies available to creditors and debtors differ significantly between the two.