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What is Defeasance?
Defeasance refers to the substitution of collateral in a loan agreement. It occurs when cash or bonds equivalent to a borrowers debt is substituted for the collateral and used to service the debt. Defeasance often renders a loan void given that the borrower sets aside sufficient cash to offset the outstanding debt. Defeasance is commonly used in a portfolio of U.S securities.
Back To: COMMERCIAL LAW: CONTRACTS, PAYMENTS, SECURITY INTERESTS, & BANKRUPTCY
Example of Defeasance
Commercial real estate is a peculiar area where defeasance is commonly used. Often, real estate loans come with pre-payment penalties. Bondholders strive to avoid prepayment penalties in commercial loans by paying off the debt early enough through defeasance. This provision nullifies the prepayment penalties associated with the loan.
Related Topics
- Perfection of a security interest?
- Perfecting a security interest in personal property?
- UCC-1 Statement
- Security interest in real property (land)?
- Register of Deeds
- Automatic Perfection of a security interest?
- Purchase Money Security Interest (PMSI) in consumer goods?
- Purchase Money Grace Period for a PMSI in non-consumer goods?
- Continue perfection of a PMSI in non-consumer goods?
- Temporary Automatic Perfection in Proceeds from the sale of goods?
- How is a security interest created in Assignment of Accounts Receivable and Contract Rights?
- Perfect a security interest by Possession of the collateral?
- Perfect a security interest by Control of collateral?
- Perfect a security interest by Filing a Financing Statement?
- Authorization is required to file a financing statement?
- Where to file a financing statement?
- Defeasance
- Continuation Statement
