When Cash Is Collateral, and When It Matters
You’ve just finished an expensive meal and reach for your wallet to pay, only to discover that you’ve left it six blocks away in your car. You run to get your wallet, but first you leave your wrist watch with the waiter so he knows you’re coming back. The notion of collateral is simple enough: it’s what a creditor gets if a debtor defaults. For most consumers, the bigger the loan is, the more likely it is that there’s some kind of collateral backing up the borrowers rosy projections. Usually, collateral takes the form of a house or a car, but banks are smart and, especially if a borrower is obtaining a loan for investment or business purposes, they will often extend their collateral-loving reach to include an operation’s proceeds as collateral. You want to buy a duplex and fill it with tenants. Fine, says the bank, we’ll loan you the money, but if you default, we’re taking back not only the duplex but the rental income your tenants are paying you, too. In other words, the rent money tenants pay is just as much the bank’s collateral as the drywall. In most consumer cases, a secured-lender is happy just to foreclose on a non-performing loan without much fuss about what a debtor landlord did with the rent money. But in chapter 11 cases where businesses or high-debt individuals are attempting to reorganize or undergo a controlled liquidation, this cash collateral can become the subject of real disagreement between debtors and creditors. In those cases where a lender holds a lien expansive enough to include a debtor’s cash as part of its collateral, a debtor must obtain a court order granting it permission to use the money it earns from its business operations.
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For more than 20 years, the Sasser Law Firm has been helping individuals and business owners sort through financial hardships to see the light at the end of the tunnel. Our North Carolina bankruptcy attorneys are all board-certified specialists, which means we have passed a complex exam, undergone a thorough peer review, and continue to earn legal education credits in this ever-evolving area of law.
