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What is a Cross-Collateral Clause? A Comprehensive Overview
Definition & Meaning
A cross-collateral clause is a provision in a contract that allows a seller or lender to reclaim not just the specific item sold or financed, but also any other related assets if the buyer or borrower defaults on their payment obligations. This clause is often included in installment contracts or security agreements, giving the seller or lender rights over multiple assets that may have outstanding balances. It is also known as a dragnet clause.
Table of content
Legal Use & context
Cross-collateral clauses are commonly used in various legal contexts, particularly in finance and real estate. They are relevant in:
Loan agreements, where a lender may secure a loan with multiple assets.
Sales contracts, particularly for high-value items like vehicles or equipment.
Users can manage these agreements using legal templates available through platforms like US Legal Forms, which provide professionally drafted documents for various situations.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A person takes out a loan to purchase a car. The loan agreement includes a cross-collateral clause that allows the bank to seize the car and any other vehicle the borrower has financed with them if they fail to make payments.
Example 2: A business owner buys equipment with an installment plan that includes a cross-collateral clause. If the business defaults on the payment, the seller can reclaim the equipment and any other items purchased under similar terms. (hypothetical example)
State-by-state differences
Examples of state differences (not exhaustive):
State
Key Differences
California
Strict requirements for disclosure in consumer loans.
Texas
Allows for broader use of cross-collateral clauses in commercial agreements.
New York
Requires clear definitions of collateral in the agreement.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Key Differences
Cross-Collateral Clause
A clause allowing a lender to claim multiple assets if one loan is defaulted.
Applies to multiple assets under one agreement.
Collateral
Specific asset pledged as security for a loan.
Refers to a single asset rather than multiple.
Dragnet Clause
Similar to cross-collateral, but often used in broader contexts.
May cover all debts rather than just specific loans.
Common misunderstandings
What to do if this term applies to you
If you are entering into a contract with a cross-collateral clause, consider the following steps:
Review the agreement carefully to understand the implications of the clause.
Ensure that all assets listed are clearly defined and that you are comfortable with the terms.
If necessary, consult a legal professional for advice tailored to your situation.
Explore US Legal Forms for templates that can help you create or modify agreements.
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