Cross Collateralization - Explained
What is Cross-Collateralized?
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Table of ContentsWhat is Cross Collateralization?A Little More on What is Cross CollateralizationAcademic Research for Cross Collateralization
What is Cross Collateralization?
Cross-collateralization refers to the act of utilizing an asset as collateral in a loan, and that asset is currently used as collateral for another loan.
How Does Cross Collateralization Work?
Cross-collateral refers to a method that lenders use to utilize the collateral of a loan such as a car to secure a second loan that an individual may have with the lender. When an asset is cross-collateralized, it brings up issues as to which secured party has priority to the asset in the event of default.
Collateral cross loans can also be used in mortgage loans especially with construction loans where a borrower has multiple properties. For instance, if a building constructor who has more than two properties wants to be financed for an upcoming project, the lender may decide to fix the new loan where they may place a lien against one or more of the builder's properties. The lender also becomes the high-level lien, particularly on all properties. This makes it complex for the parties to sell.
- What is a Security Interest?
- Pledge as Collateral
- Cross Collateralization
- After-Acquired Collateral
Unsecured Loan Definition
- Unencumbered Asset
- What is a Secured Creditor?
- Unsecured Creditor
- What are the benefits of security interests for creditors?
- Limited Recourse Debt
Academic Research for Cross Collateralization
- A Critical Reappraisal of Cross-Collateralization in Bankruptcy, Tabb, C. J. (1986). S. Cal. L. Rev., 60, 109. This paper analyses the fact that recently, public attention has focused on alleged abuse perpetrated in chapter 11 of the federal bankruptcy laws including solvent companies that have been filing for bankruptcy to deal with the avalanche of claims related to asbestos against it. In chapter 11, practice largely escaping notoriety refers to the court-authorized preferential treatment that certain unsecured cases of cross-collateralization. It concludes that such treatment is neither proper nor permissible.
- The Legal Justification for the Proper Use of Cross-Collateralization Clauses in Chapter 11 Bankruptcy Cases, Bohm, J. (1985). Am. Bankr. LJ, 59, 289. This article presents answers to questions about the use of cross-collateralization loans clauses to have access to postpetition financing and how the issue has created disagreement between investors, commentators, as well as bankruptcy courts. While many commentators assert that the agreements have violated the fundamental principles of bankruptcy law, one court has invalidated a financing policy that has a cross-collateralization clause to uphold various principles.
- Purchase Money Inventory Financing: The Case for Limited Cross-Collateralization, Wessman, M. B. (1990). Ohio St. LJ, 51, 1283. This article analyzes the application of article 9 of the Uniform Commercial Code that specifically grants the use of after-acquired property policies as well as future advance clauses in different security agreements. As such, including a well-drafted agreement of every type in the security agreement will enable a secured creditor to access a cross-collateralization.
- Balancing of Interests in Orders Authorizing the Use of Cash Collateral in Chapter 11, Stripp, S. A. (1990). Seton Hall L. Rev., 21, 562. This paper analyzes the fact there should be a balancing of different interests when it comes to authorizing the use of money collateral. Chapter one highlights the fact that the committee acknowledges that involved debtors need the use of money collateral and that the given petition secured parties are eligible for adequate protection. However, no protection is provided against the diminution of their collateral. As such, the requested relief in the motion would give the prepetition secured parties additional protection. That would be reasonable. Additionally, Debtors propose to the grant super-priority status as well as all administrative expense claims that have been held by the secured parties.
- Discharge, Waiver, and the Behavioral Undercurrents of Debtor-Creditor Law, Baird, D. G. (2006). The University of Chicago Law Review, 73(1), 17-31. This chapter reiterates the fact that an individual in financial distress often enjoys vital rights. One, they can protect some of their assets from creditors even if they are bankrupt. A creditor can't seize the assets on the debtor's back, the tools of the trade, or essential household items as well as jewelry or the homestead. Second, the debtor, if honest, has a primary tight to a fresh start to bankruptcy. One can also file a petition of bankruptcy and obtain a discharge of initial debt.
- Cross-Collateralization in Chapter 11: Protecting the Small Business, Jordan, D. A. (1993). Wayne L. Rev., 40, 219. This article offers answers to questions regarding cross-collateralization in the chapter where small businesses should be protected. In spite of the state of the economy, a business can be declared bankrupt. But, filing a petition of bankruptcy offers the business an opportunity to reorganize and be more profitable in the future. In the case of slightly larger companies, gaining access to the petition may not be complicated. But for small companies, it may seem like a tall order.
- Defining Unfairness: Empathy and Economic Analysis at the Federal Trade Commission, Braucher, J. (1988). BUL Rev., 68, 349. The objective of this paper is to provide a detailed description of Jean Brauchers sentiments regarding contract law alongside the character to which it suggests to apply just as revealed in her writing. It also seeks to highlight the definition of unfairness and empathy when it comes to economic matters. People have often wondered what unfair is in the world of cross-collateralization. While the question seems narrower, it begs to receive the input of some of the revered business professionals. As such, it is clear that the theory of justice applies where it states that other than the adherence to the norms, the clause affects everyone.
- The value of recourse and cross-default clauses in commercial mortgage contracting, Childs, P. D., Ott, S. H., & Riddiough, T. J. (1996). Journal of Banking & Finance, 20(3), 511-536. This chapter disintegrates the value of resource as well as cross-default clauses in the industry of commercial mortgage contracting. According to the article, the traditional commercial mortgage contract is often written without resources to other borrower assets except for the subject property. For the sake of credit enhancement, many lenders and investors seek to gain access to more collateral via the resources or cross-default clauses. The article also analyzes the contracting value of different clauses. To evaluate these values and related risks, researchers apply a contingency claim approach where borrowers can default when the mortgage value meets the collateral value.
- Initial financing restrictions in Chapter xi bankruptcy proceedings, Cobb, P. V. Z. (1978). Columbia Law Review, 1683-1699. In this chapter, the article highlights the value of the Bankruptcy Code particularly by providing the reorganization of finances and assets using a corporation or partnership. Any Chapter 11 debtor can propose a plan of reorganization to keep the business alive while it pays creditors. Business professionals can also seek help in the same chapter. On the other hand, one cannot file under the section if, during the 180 days, a bankruptcy petition was dismissed.
- Postpetition Financing: Is There Life After Debt, Henoch, B. A. (1991). Bankr. Dev. J., 8, 575. The research in this paper was conducted to establish if theres life after debt. It was discussed that even though the number of petitions filed under chapter 11 of the Bankruptcy Code has progressively decreased since the mid-1080s, the size of the firm filing these petitions has vastly increased. For instance, in mid-1990, approximately 19 companies with assets worth $48 billion filed their petitions under chapter 11. This number surpassed the total amount of companies that submitted their petition for asset protection in 1989.
- Defining Purchase Money Collateral, Shupack, P. M. (1992). Idaho L. Rev., 29, 767. This material deals with a few small and interstitial issues regarding some questions that under the current revision practices don't rise in value to be dealt with in the 2010 amendments. Immediately the agenda of problems are defined, the limits that were created by the same agenda have to be observed, even in the case where the article was available. For anyone drafting a statute, using defined terms and their meanings can be challenging. That's why Former Article 9 decided to take precaution and introduce the section containing various definitions.