Michigan Collections Manager License Practice Test

How should expenses related to collateral be handled by the secured party?

1. Charged to the debtor

2. Ignored entirely

3. Covered by the secured party

4. Charged to the agency

The correct answer is: Charged to the debtor

The correct choice is for expenses related to collateral to be charged to the debtor because, under secured transactions, the debtor is primarily responsible for the costs associated with maintaining and preserving the collateral. When a secured party, such as a lender, provides financing secured by collateral, they have the right to recover certain expenses incurred in connection with that collateral. This can include costs associated with maintaining, storing, or insuring the collateral. Charging these expenses to the debtor aligns with the principle that the debtor benefits from the use of the secured asset and should bear the associated costs. This requirement is typically outlined in the security agreement that governs the relationship between the debtor and the secured party. By ensuring that these expenses are recoverable from the debtor, the secured party protects their investment and can more effectively manage the risks associated with the collateral. In contrast, ignoring these expenses, covering them entirely as the secured party, or charging them to an unrelated agency doesn't align with the customary practices found in secured transactions or commercial law, which recognize the debtor's obligation to contribute to the expenses related to the collateral they are utilizing.