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Simple English definitions for legal terms
strong-arm clause
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A quick definition of strong-arm clause:
A strong-arm clause is a rule in bankruptcy law that lets a trustee cancel a security interest if it wasn't properly recorded when the bankruptcy case began. This means that if someone owes money and used something as collateral, like a car or a house, but didn't follow the correct legal steps to make sure the creditor had a right to that property, the trustee can take it away and use it to pay off the debts.
A more thorough explanation:
A strong-arm clause is a provision in the Bankruptcy Code that gives the bankruptcy trustee the power to cancel a security interest that is not properly recorded when the bankruptcy case is filed. This means that if a creditor has a security interest in a debtor's property, but that interest is not legally recorded, the trustee can cancel it and sell the property to pay off the debtor's debts.
Let's say that John borrows money from a bank to buy a car. The bank takes a security interest in the car, which means that if John doesn't pay back the loan, the bank can repossess the car. However, the bank forgets to properly record the security interest with the state. Later, John files for bankruptcy. The trustee can use the strong-arm clause to cancel the bank's security interest and sell the car to pay off John's debts.
Another example could be a landlord who fails to properly record a security interest in a tenant's property. If the tenant files for bankruptcy, the trustee can use the strong-arm clause to cancel the landlord's security interest and sell the property to pay off the tenant's debts.