Legal Definitions - proceeds

Proceeds refers to the value, typically in the form of money, that is obtained from selling, exchanging, or otherwise disposing of property, goods, or investments. In a broader legal context, especially in financial transactions where assets are used as collateral for a loan, "proceeds" can also refer to anything received when the original collateral is sold, exchanged, collected, or otherwise disposed of, even if it changes its form.

The term net proceeds specifically refers to the amount remaining after all associated costs, expenses, and commissions have been deducted from the total amount received in a transaction.

• Example 1: Sale of Personal Property

  Imagine a person decides to sell their classic car. They list it online and eventually find a buyer who pays them $45,000. This $45,000 is the proceeds from the sale of the car.

  Explanation: This illustrates the most common understanding of proceeds as the money directly received from selling an asset.

• Example 2: Collateral in a Business Loan

  A small electronics store takes out a business loan, using its current inventory of laptops and smartphones as collateral. This means if the store defaults on the loan, the lender can claim the inventory. If the store then sells some of those laptops to customers, the cash received from those sales becomes the proceeds of the original inventory collateral.

  Explanation: Here, the original collateral (the physical electronics) has been converted into cash. The lender's security interest typically extends to these proceeds, meaning they would have a claim to that cash if the loan isn't repaid.

• Example 3: Real Estate Transaction with Net Proceeds

  A couple sells their home for $600,000. This $600,000 is the total amount received, often called the gross proceeds. However, they must pay a real estate agent's commission of $36,000, closing costs totaling $12,000, and pay off their outstanding mortgage of $250,000. After all these deductions, the amount of money they actually receive in their bank account is $302,000. This remaining $302,000 is the net proceeds from the sale of their home.

  Explanation: This example highlights the distinction between the total amount received from a sale (gross proceeds) and the amount left after all expenses related to the transaction are subtracted, which is the net proceeds.