What is an equitable charge?

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An equitable collection is an agreement where a debtor chooses to use an asset as collateral for some type of financial obligation, such as a debt. While the debtor retains control and use of the asset, the creditor has a right to that asset in the event of a default on the obligation. Typically, with this arrangement, the creditor has the right to use the legal process to claim and secure ownership of the asset as a means of paying off the defaulted debt.

The constitution of an equitable charge begins with the offering of some kind of good by the owner as security for a debt that is owed to a creditor. Assuming the property is worth equal to or greater than the amount owed, the lender will generally accept this collateral. In exchange for this acceptance, the debtor agrees that, in the event of non-payment of the outstanding debt, the creditor has the right to obtain control of that asset in order to settle the debt.

Depending on the laws that prevail in the jurisdiction involved, an equitable prosecution usually involves filing an appeal with a court. The court will assess the merits of the case and render a judgment. Sometimes the court may decide to simply transfer ownership of the pledged collateral to the creditor and consider the matter settled. At other times, the court may choose to order the sale of the asset, with the proceeds of the sale intended to reimburse the creditor and defray court costs. If funds remain after the settlement of the obligation, they can be delivered to the debtor, who is also a defendant in the lawsuit.

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Arranging for equitable collection is often a way of allowing the debtor to receive more attractive financing arrangements from a creditor. Pledge of some sort of asset as security for the transaction helps to alleviate some of the risk that the lender assumes in granting a loan or other form of credit to the borrower. Since the pledge is only executed on the value of the default, the debtor can use the asset in any way that does not affect its value. In addition, the debtor cannot sell the asset for the duration of the debt obligation without the express authorization of the creditor. Once the debt is paid in full, any claims the creditor has against the equitable burden are null and void, and the debtor is free to do whatever he wants with that asset.

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