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Nonpossessory Security Interest

Historically, a security interest was in the form of a pledge and was possessory meaning that the creditor literally took possession of the property subject to the security interest. Over time secured financing evolved to allow for nonpossessory security interests that do not entail possession by the creditor but rather leave possession in the debtor. Most security interests today are nonpossessory because, with limited exceptions, it is not practicable for the debtor to give up possession or for the creditor to take possession. A problem with nonpossessory interests is that they can be misleading in that third parties may believe that property in the possession of a debtor is "unencumbered ," that is, held free of liens. The law has dealt with the potential problem of so-called "secret liens" by requiring that some kind of public notice be given as to many nonpossessory security interests. Under the bankruptcy law the failure to give such required public notice often leaves the security "unperfected," and subject to avoidance by the trustee. See BRA s544. Certain types of nonpossessory security interests that also are nonpurchase money in nature sometimes can be avoided even though they are perfected.