An equitable charge is an arrangement in which a debtor chooses to use an asset as security 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 that a default on the obligation should take place. Typically with this arrangement, the creditor has the right to make use of the judicial process to petition for and secure ownership of the asset as a means of settling the defaulted debt.
The creation of an equitable charge begins with the offer of some sort of property by the owner as security for a debt that is owed to a creditor. Assuming that the property is of equal or greater value than the amount owed, the creditor will usually accept this pledge of security. In exchange for that acceptance, the debtor covenants that in the event of non-payment of the outstanding debt, the creditor has the right to gain control of that asset in order to settle the debt.
Depending on laws that prevail in the jurisdiction involved, an equitable charge will usually involve making an appeal to a court. The court will assess the merits of the case and render a judgment. At times, the court may determine to simply transfer ownership of the pledged security to the creditor and consider the matter settled. At other times, the court may choose to order the sale of the asset, with the proceeds from the sale going to repay the creditor and cover court costs. In the event any funds remain after settling the obligation, those may be tendered to the debtor, who is also the defendant in the court action.
Arranging an equitable charge is often a way of allowing the debtor to receive more attractive financing arrangements from a creditor. Pledging some sort of asset as security on the transaction helps to alleviate some of the risk that the creditor takes on by extending a loan or other form of credit to the debtor. Since the pledge is only enforced in the amount of default, the debtor is able to use the asset in any way that does not impact its value. In addition, the debtor cannot sell the asset for the duration of the debt obligation without the express permission of the creditor. Once the debt is repaid in full, any claims that the creditor has in regards to the equitable charge are rendered null and void, and the debtor is free to do whatever he or she desires with that asset.
