Man climbing a rope
An equitable collection is an arrangement 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 is entitled to that asset in the event of a breach of the obligation. Generally, 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 delinquent debt.
The creation of an equitable charge begins with the offer of some type of property by the owner as security for a debt 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 prevailing in the jurisdiction involved, a fair trial usually involves filing an appeal in court. The court will assess the merits of the case and pass judgment. Sometimes the court may decide to simply transfer ownership of the collateral to the creditor and settle the matter. On other occasions, the court may choose to order the sale of the property, with the proceeds of the sale used to reimburse the creditor and defray court costs. If funds remain after settlement of the obligation, they can be delivered to the debtor, who is also sued in court.
Arranging for equitable collection is often a way to allow a debtor to receive more attractive financial settlements from a creditor. The pledging of some type of asset as collateral for the transaction helps to alleviate some of the risk that the lender assumes when 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 property for the duration of the debt obligation without the express authorization of the creditor. Once the debt is paid in full, any claim the creditor has against the equitable charge is null and void, and the debtor is free to do as he pleases with that asset.