Equitable charge is an agreement where a debtor uses an asset as collateral for a financial obligation. The creditor has a claim on the asset in case of a breach of obligation, and the court may transfer ownership or order the sale of the asset to settle the debt. This arrangement helps the debtor receive attractive financial arrangements from the creditor.
An equitable charge is an agreement in which 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 claim on that asset in the event of a breach of obligation. Generally, with this agreement, the creditor has the right to use the judicial process to request and secure ownership of the asset as a means to settle the defaulted debt.
The creation of an equitable charge begins with the owner offering some type of property as security for a debt owed to a creditor. Assuming the property is worth equal to or greater than the amount owed, the creditor will generally accept this security pledge. In exchange for that acceptance, the debtor establishes that, in the event of default on the outstanding debt, the creditor has the right to obtain control of that asset to settle the debt.
Depending on the laws that prevail in the jurisdiction involved, a fair charge will generally involve filing an appeal in court. The court will evaluate the merits of the case and issue a ruling. On occasion, the court may decide simply to transfer ownership of the pledged security to the creditor and consider the matter resolved. At other times, the court may choose to order the sale of the asset, with the proceeds of the sale paying the creditor and covering court costs. If funds remain after the obligation is settled, they can be delivered to the debtor, who is also the defendant in the lawsuit.
Arranging for an equitable charge is often a way to allow the debtor to receive more attractive financial arrangements from a creditor. Promoting some type of asset as collateral for the transaction helps to alleviate some of the risk that the creditor assumes in extending a loan or other form of credit to the debtor. Since the promise only applies in the amount of default, the debtor can use the asset in any way that does not affect its value. In addition, the debtor may not sell the asset for the duration of the debt obligation without the express permission of the creditor. Once the debt is paid off in full, any claim the creditor has in connection with the equitable charge is null and void, and the debtor is free to do as they wish with that asset.
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