What are the consequences of failing to perfect a security interest?

Failing to perfect a security interest primarily results in the loss of priority in favor of other creditors. In secured transactions, perfection serves to establish the secured party's rights in the collateral against third parties, including other creditors. If a security interest is not perfected, it can be subordinate to the claims of other creditors who may have subsequently perfected their interests or have priority due to the statutory framework established by the Uniform Commercial Code (UCC).

This loss of priority means that, in the event of the debtor's bankruptcy or default, other creditors may be able to claim the collateral before the unperfected secured party can enforce their interest. Thus, while a secured party may still have some claim to the collateral based on the security agreement, without perfection, they risk not being able to collect on that interest in a manner that prioritizes their claims over those of other creditors.

The other choices refer to situations that typically do not arise directly from failing to perfect a security interest. For example, increased debt obligations for the debtor (choice B) are generally unrelated to the perfection process; instead, they pertain more to the terms of the debt arrangement itself. A required renouncement of the security agreement (choice C) does not result from perfection issues. Lastly,