After-Acquired Collateral – Definition

Cite this article as:"After-Acquired Collateral – Definition," in The Business Professor, updated September 5, 2019, last accessed August 4, 2020, https://thebusinessprofessor.com/lesson/after-acquired-collateral-definition/.

Back To: COMMERCIAL LAW: CONTRACTS, PAYMENTS, SECURITY INTERESTS, & BANKRUPTCY

After-Acquired Collateral Definition

After-acquired collateral refers to a security pledged to acquire a loan that is collected from the borrower by the lender only after both parties have agreed and entered a loan. This loan system is mostly used in a situation where the borrower has insufficient finance or assets to cover up the loan cost. When this agreement is initiated, it is believed that the borrower might acquire some new properties in the future, and thus, the name; after-acquired. When this happens, the lender gets to collect the property as collateral if it equals the cost of the loan.

A Little More on What is After-Acquired Collateral

After-acquired collateral is any asset which a person gets after a loan agreement has been reached. After acquiring this property, it is then used as collateral, although that particular asset was not in the loan agreement. To avoid any contract loopholes, the borrower signs a deal that allows the lender to incorporate any future acquisition as collateral for the loan. This way, whatever the debtor has afterward will be tagged a pledged security till their worth equals what is needed as collateral for the loan.

In the case of wills, after-acquired collateral refers to any property which the testator (someone who has created a will or legacy) obtains after creating his or her will. Also, the monetary support which a business receives after filing for bankruptcy is also after-acquired collateral.

When signing this type of contract, ultimate care should be taken as well as perfect consideration of the debtor. In the loan agreement, the lender drafts out what type of future acquisitions can serve as collateral, and to what amount. This kind of agreement is usually signed when the borrower has less than the security needed as collateral by the lender for the property. Thus, if the borrower really needs the asset, he or she will have to sign after-acquired collateral using the conditions above.

Margin Call and After-Acquired Collateral

In the stocks and forex market, Margin is a case where an investor or a trader borrows money (takes leverage) from his or her broker, and uses this amount to place a trade or buy shares. Margin is sometimes classified as after-acquired collateral since the investor will have to pay back from future earnings, and he or she will already need to have some amount of asset inside the pool. This amount which belongs entirely to the trader is called his or her equity, and it is the difference between their total balance and their leverage. The margin call comes into play when the investor’s personal security loses value in the market by a particular amount. The entity which calls for more collateral or issues a margin call, in this case, is the broker.

Illustration of Margin Call and/or After-Acquired Collateral

Let us take into consideration a trader who buys $200000 value of stocks from a company using bought his personal amount and leverage from the broker. In this case, the leverage taken was worth $100000, thus making the investor’s equity to be another $100000. Now while trading, this investor got a negative return of 30%, reducing his total balance to $140,000. This translates to having an equity of $40,000 (i.e. $140,000 – $100,000 which is the brokers fund). However, in the agreement, this investor is required to have no less than $50,000 to be able to use leverage. This triggers a margin call from the broker asking him to add another $40,000 to his account to ensure that the leverage agreement is still intact, and he can continue using this borrowed funds to trade.

The additional $10,000 which this trader is to deposit is called after-acquired collateral since it is issued only after the leverage agreement has been active.

Reference for “After-Acquired Collateral”

https://www.investopedia.com/terms/a/after-acquired-collateral.asp

https://www.lawinsider.com/clause/after-acquired-collateral

https://en.wikipedia.org/wiki/After-acquired_property

www.investorwords.com/144/after_acquired_collateral.html

https://www.upcounsel.com/after-acquired-property-clause

Academics research on “After-Acquired Collateral”

The Bankruptcy Preference Challenge to After-Acquired Property Clauses Under the Code, Friedman, H. (1959). The Bankruptcy Preference Challenge to After-Acquired Property Clauses Under the Code. University of Pennsylvania Law Review, 108(2), 194-224.

Simultaneous Attachment of Liens on After-Acquired Property, Carlson, D. G. (1984). Simultaneous Attachment of Liens on After-Acquired Property. Cardozo L. Rev., 6, 505.

The After-Acquired Property Clause Revisited, Riemer, B. A. (1965). The After-Acquired Property Clause Revisited. Com. LJ, 70, 334.

Security Interests in After-Acquired Property Under the Uniform Commercial Code, Skilton, R. H. (1974). Security Interests in After-Acquired Property Under the Uniform Commercial Code. Wis. L. Rev., 925.

Treatment of Security Interests in After-Acquired Property Under the Proposed Bankruptcy Act, Kronman, A. T. (1975). Treatment of Security Interests in After-Acquired Property Under the Proposed Bankruptcy Act. U. Pa. L. Rev., 124, 110.

Was this article helpful?