Legal Definitions - Arkansas rule

ARKANSAS RULE

The Arkansas rule is a principle in secured transactions that states that the collateral used to secure a loan is assumed to be worth at least as much as the loan's balance. The creditor has the responsibility to prove that selling the collateral would not satisfy the loan amount.

For instance, if a borrower takes out a loan of $10,000 and uses their car as collateral, the Arkansas rule assumes that the car is worth at least $10,000. If the borrower defaults on the loan, the creditor must prove that selling the car would not cover the loan amount.

Another example is if a business takes out a loan and uses their inventory as collateral. The Arkansas rule assumes that the inventory is worth at least the amount of the loan. If the business defaults on the loan, the creditor must prove that selling the inventory would not cover the loan amount.

These examples illustrate how the Arkansas rule protects borrowers by ensuring that creditors cannot take advantage of them by undervaluing their collateral. It also places the burden of proof on the creditor to show that the collateral is not worth the loan amount.