What are 'proceeds' of collateral, and why must they be included in a security interest?

• A. Proceeds are the original collateral.
• B. Proceeds are property obtained with or derived from the collateral (e.g., insurance payments, replacements); the security interest should attach to proceeds to preserve lien coverage.
• C. Proceeds are profits from the borrower's business.
• D. Proceeds are government payments.

Answer: (B)

Proceeds are the property obtained from or derived from the collateral, not just the original collateral itself. This includes cash or other property received when the collateral is sold, as well as amounts like insurance or condemnation payments, or replacement goods acquired with those funds. The security interest should attach to those proceeds to preserve lien coverage, so the lender’s claim remains in place even as the collateral is damaged, replaced, or disposed of. For example, if inventory pledged as collateral is damaged and an insurance payout is received, that payout is proceeds and should stay encumbered by the security interest; if the payout is used to buy replacement inventory, the new items remain covered. Proceeds aren’t limited to business profits or unrelated government payments unless those receipts are tied to the collateral.