Also known as bootstrapping. A practice used in DIP financing arrangements in which a debtor grants its existing prepetition lender a security interest in assets acquired after the bankruptcy filing (such as additional inventory) to secure both debt incurred prepetition and debt to be incurred postpetition.

Cross-collateralization improves the prepetition lender's collateral position and is used to induce it to extend new postpetition loans to the debtor. Absent cross-collateralization, postpetition assets (except for the proceeds of prepetition collateral) are not subject to the lender's prepetition lien (§ 552(a), Bankruptcy Code).

Courts are reluctant to approve cross-collateralization because of the Bankruptcy Code's clear distinction between prepetition and postpetition assets and liabilities. Courts approving cross-collateralization have done so reluctantly with certain requirements, including requiring notice to affected parties and a showing that the debtor will not survive without the proposed financing. The main objections against cross-collateralization are that it is:

Closely related to cross-collateralization are roll-ups, which have the same effect as cross-collateralization because they result in prepetition debt becoming secured with postpetition collateral. This cross-collateralization effect is a common objection to roll-ups.

Outside of bankruptcy, cross-collateralization is a common commercial practice.