Cross Collateralization Definition
Cross-collateralization refers to the act of utilizing an asset currently used as collateral particularly for initial loan and as collateral for another loan. If the debtor in question is not in a position to make repayments on time, the lenders who will be affected can force the liquidation of those assets and utilize the proceeds primarily for repayment.
A Little More on What is Cross Collateralization
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. Although the process may seem reasonable in terms of taking precaution, borrowers may fail to realize that the lender is so much in control of their finances when exercised. One can avoid selling their car if their lender wishes to keep it as collateral. Also, if an individual fail to pay on time or if they fall behind on a secured loan, such as a credit card, the lender may take possession of the car. If one files for bankruptcy, they may have to give up their vehicle or property to the lender until their debt has been paid. Cross-collateralization may be applied with various forms of financing where consumers who acquire funding from a credit union to buy a vehicle may sing a loan agreement that utilizes the vehicle as collateral. In most cases, the consumer may not be aware that the loan agreement can stipulate that the car will also be used as collateral in case there is a need to secure other loans they take out with the credit union. The lien placed on the car from the loan will then apply to other financing accounts that the consumer opens with the institution.
Credit Union practices
Although collateral cross loans are often used in various car loans, they are prominent in credit unions. Bank credit cooperatives work differently in that they originate from their members. Therefore, the clause is additional protection against loan losses that may be shared by union members. The attractiveness of these unions is their willingness to extend their terms of the loan by imposing a favorable policy, especially where one has an existing relationship with them. In cases where there’s financing a car via credit union or having a savings account with the union, one is likely to receive various offers for the unsecured low-speed loan.
Moreover, credit unions are one attractive way to alternative banking as well as loans for multiple reasons such as a lower bank as well as debt costs. Cross-guarantees can be a disadvantage if one isn’t aware of the potential impacts on their finances. If you want to take up a loan from a credit union, it’s vital to take a few precautions:
- Avoid taking more than one loan at a time.
- Don’t take up a credit card account or a line of credit if you have a car loan.
- If there’s no bank where you borrow, continue to check your account in a possibly different institution.
- Lastly, always read through the fine print of any loan document you’re about to take.
Collateral cross loans in mortgage loans
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.
Basically, cross-guarantee has the highest priority when it comes to project asset as well as cash flow control. This is often higher than the asset mortgage alongside credit guarantee presented to the lending bank. In the case of a non-corporate joint venture structure, every investor adopts a unique funding arrangement while some investors may take up different financing methods, or syndicate separately arranged project financing for different investors. In the future, this contradiction will be prominent since if the investor in this question defaults, in most instances, they will be a default against the lender. It’s important for the investor to know how to deal with the mortgage of the defaulting project assets as well as their rights between the project as well as the non-defaulting party.
References for Cross Collateralization
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 Braucher’s 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 there’s 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.