Liens Based on Obligations

Loans made in cash can effectively strip assets from an individual or business but have significant drawbacks because they can create a tax burden on interest payments and commercial lending may not be a viable option for every business. Interest payments must be made to constitute a valid loan and a stripped entity can sometimes no longer present a going business concern.

A lien that secures another form of obligation can sometimes be more effective than a cash loan because there are no cash components involved (and therefore no tax consequences) and these types of transactions are relatively easy to structure as a security agreement or other instrument that can be unattractive to a creditor and do not result in a cash element that needs to be further protected.

If a business has cash flow problems, satisfying a cash obligation can be difficult and can lead to greater complications (including foreclosure), so the obligation based lien is possibly a superior alternative that eliminates many of the fair valuation tests of a qualified transaction.

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