Michigan Collections Manager License Practice Test

In the event of default, what must a secured party do?

1. Notify the debtor of the default

2. Instruct the bank to pay the balance and apply

3. Take possession of the collateral immediately

4. Proceed with judicial actions against the debtor

The correct answer is: Instruct the bank to pay the balance and apply

In the context of secured transactions, when a debtor defaults on a secured obligation, the secured party has certain rights and responsibilities regarding the collateral that secures the debt. The correct approach focuses on the secured party’s obligation to enforce their rights concerning the collateral rather than relying only on judicial measures or direct debtor interactions. The action that a secured party must take largely pertains to their right to the collateral. Specifically, the secured party should proceed to enforce their security interest by either taking possession of the collateral or initiating a process to liquidate it based on applicable laws or agreed-upon terms. In many cases, this may involve the secured party directly managing the collateral or working within banking systems for reimbursement, depending on the nature of the agreement and the specifics of the default. While notifying the debtor or taking possession of the collateral are both reasonable considerations in this context, the implementation of a bank instruction to handle the balance only serves as one of many potential actions following a default. It reflects an operational approach rather than the primary action expected from a secured party. Therefore, understanding the importance of managing the collateral and the remedies available to the secured party following a default is essential, emphasizing the need for an active approach rather than simply relying on financial transactions or legal actions.