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Simple English definitions for legal terms
cross-collateralization
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A quick definition of cross-collateralization:
Cross-collateralization is when someone uses more than one thing as security for a loan. For example, if you borrow money to buy a car and use your house as collateral too, that's cross-collateralization. It means that if you can't pay back the loan, the lender can take both your car and your house to pay off the debt.
A more thorough explanation:
Definition: Cross-collateralization is a type of security given by all parties to a contract. It is a form of collateral that protects a creditor's postpetition extension of credit and prepetition unsecured claims, which obtain priority over other creditors' prepetition unsecured claims.
Examples:
- When a person takes out a loan to buy a car, the car becomes the collateral for the loan. However, if the person also takes out a loan for a house and uses the same car as collateral, this is an example of cross-collateralization.
- In bankruptcy cases, a creditor may use cross-collateralization to protect their interests. For example, if a debtor owes money on multiple loans with the same creditor, the creditor may use the collateral from one loan to secure the other loans as well.
These examples illustrate how cross-collateralization works by using the same collateral to secure multiple loans or debts. This can be beneficial for creditors as it provides additional security for their loans, but it can also be risky for borrowers as it puts more of their assets at risk if they default on any of the loans.