Cross Collateralization Law and Legal Definition
Cross-collateralization refers to the ability to make use of cash flow generated by one project to cover the expenses of a different project. It is a practice by which the financial losses in one medium or market is off-set against revenue derived from others This strategy is employed in a number of different business situations. Usually, the ability to engage is this type of financial arrangement is covered in the terms and conditions of legal documents related to the projects in question.
For example, record company may choose to use the proceeds generated by the sale of one musical release to fund the development of a new release. The money that is advanced from one project is used to cover the expenses of a new project. As the new release begins to earn money for the company, the advanced funds are repaid to the original project.
Again it can be used in the process of granting loans. The collateral for one loan is also used as collateral for another loan. One common example of this type of collateralization is when a home owner is allowed to use the property as collateral for both a first and a second mortgage. Technically, cross-collateralization expires when the borrower has no outstanding loans with the bank.
In the context of bankruptcy, cross-collateralization also means the collateralization of general unsecured prepetition debt by collateral securing postpetition loans.