What is a trust receipt in a secured transaction?

What is a trust receipt in a secured transaction?

• A. A document guaranteeing the return of collateral
• B. An acknowledgment that the debtor holds goods as collateral
• C. A record of title transfer for collateral
• D. A loan agreement for secured goods

Answer: (B)

A trust receipt serves as a crucial document in secured transactions, specifically in situations where a lender provides financing based on collateral that remains in the possession of the borrower. The primary function of the trust receipt is to act as an acknowledgment that the borrower (debtor) is holding specific goods as collateral for a loan or obligation. When a debtor receives financing secured by inventory or goods, the trust receipt confirms that the debtor must treat those goods as security for the creditor’s rights. Under this arrangement, the lender maintains a security interest in the goods while allowing the borrower to use or sell them in the normal course of business. This creates a legal framework that helps protect the lender’s interests while permitting the borrower some level of operational flexibility. The other choices do not accurately reflect the specific nature of a trust receipt. It does not act merely as a guarantee or a loan agreement; rather, it specifically acknowledges the debtor's role in holding the financed goods. Additionally, it does not serve as a record of title transfer, as the title typically remains with the borrower or the original owner unless explicitly transferred. Therefore, option B accurately describes the fundamental purpose and function of a trust receipt in the context of secured transactions.

A trust receipt serves as a crucial document in secured transactions, specifically in situations where a lender provides financing based on collateral that remains in the possession of the borrower. The primary function of the trust receipt is to act as an acknowledgment that the borrower (debtor) is holding specific goods as collateral for a loan or obligation.

When a debtor receives financing secured by inventory or goods, the trust receipt confirms that the debtor must treat those goods as security for the creditor’s rights. Under this arrangement, the lender maintains a security interest in the goods while allowing the borrower to use or sell them in the normal course of business. This creates a legal framework that helps protect the lender’s interests while permitting the borrower some level of operational flexibility.

The other choices do not accurately reflect the specific nature of a trust receipt. It does not act merely as a guarantee or a loan agreement; rather, it specifically acknowledges the debtor's role in holding the financed goods. Additionally, it does not serve as a record of title transfer, as the title typically remains with the borrower or the original owner unless explicitly transferred. Therefore, option B accurately describes the fundamental purpose and function of a trust receipt in the context of secured transactions.