Hypothecation Law and Legal Definition

The term ‘hypothecation” is used principally in the civil law. It is defined to be a right which a creditor has over a thing belonging to another, and which consists in the power to cause it to be sold, in order to be paid his claim out of the proceeds.

Hypothecation is an agreement whereby a person puts up collateral to secure the debt of another. This means that a person (not the debtor) agrees that a piece of real estate belonging to him/her will be collateral for a debt. If the debt is not paid, the creditor may have the property seized to satisfy the debt, although the person hypothecating the property is not personally liable if the collateral doesn't pay off the debt. Thus in hypothecation, the property is liable for the debt, not the person guaranteeing the debt.