What does it mean when security interests are 'perfected'?

When security interests are described as 'perfected,' it means that they have gone through a legal process that grants the creditor rights to enforce the security interest against third parties. This perfection typically involves taking steps such as filing a financing statement or taking possession of the collateral. As a result of this process, the creditor’s claim to the collateral is legally enforceable and establishes priority over other potential claims against the same collateral. This precedence is essential in situations where multiple creditors have an interest in the same asset, as perfected security interests have priority over unperfected ones in bankruptcy or foreclosure scenarios.

The concept of perfection is crucial in the context of secured transactions because it protects the interests of the lender or creditor, ensuring that they have the right to repossess or sell the collateral if the borrower defaults.