07.01 Debtor Creditor Relationships

Question 1

What is a guarantor/surety?

Answer 1

A guarantor or a surety is someone who agrees to stand liable for the debt of another. A guaranty or suretyship is a way for a creditor to have another form of backup for payment of the obligation owed. A surety or guarantor can be in addition to any collateral the debtor might pledge to the creditor.

Question 2

What are the three parties in a simple suretyship?

Answer 2

Creditor, principal debtor, surety or guarantor.
(the exam uses the terms “surety” and “guarantor” interchangeably)

Question 3

What is a guarantor of collection?

Answer 3

Does not provide an immediate guarantee of the principal debtor’s debt. Only agrees to pay the principal debtor’s debt after the creditor has exhausted all possible means of collection, including a suit to recover payment.

Question 4

What is a cosurety?

Answer 4

An additional surety of an obligation. Can be for the full or partial amount of debt.

Question 5

What is a subsurety?

Answer 5

A subsurety is s surety to a surety. There is a primary surety to step in when the debtor defaults, but it the primary surety also defaults, the subsurety steps in to pay. A creditor cannot turn first to a subsurety. The creditor must approach subsureties in the order in which they agreed to stand liable.

Question 6

What is required in the creation of a suretyship?

Answer 6

The suretyship contract must be evidenced by a record and signed by the surety for it to be enforceable against the surety. Consideration is not required. Sureties can pledge to back the debtor on 100% of the loan amount or any percentage thereof.

Question 7

What are the rights of the surety or guarantor?

Answer 7

Exoneration - The right to petition the court to order the creditor to exhaust recovery against the debtor before holding surety liable.
Reimbursement and Indemnity - Whenever the surety has fully or partially fulfilled the debtor’s obligation to the creditor, the surety has the right to seek reimbursement from the debtor.
Subrogation - Upon payment, the surety steps into the shoes of the creditor and succeeds in any rights the creditor has.

Question 8

When does the right of contribution apply?

Answer 8

The right of contribution applies when two or more cosureties are liable on the same obligation to the same creditor and, upon debtor’s default, one cosurety pays more than their proportionate share of the obligation. The right of contribution entitles the cosurety who has paid to recover the amount paid above the pro rata share from the other cosureties.

Question 9

What events do not result in the release of a surety?

Answer 9

Insolvency of the principal debtor; Bankruptcy of the principal debtor; Fraud or misrepresentation by the debtor; Principal debtor’s incapacity; Death of the principal debtor.

Question 10

What events result in the release of the surety?

Answer 10

Principal debt paid; Surety’s incapacity; Surety’s discharge decree in bankruptcy; Statute of limitations expires; Fraud or misrepresentation by the creditor; Release of the principal debtor; Refusal of the principal debtor’s tender; Material alteration by the creditor; Creditor’s failure to disclose; Changes and modifications where there is an uncompensated surety; Surrender or impairment of debtor’s collateral; Special release for guarantor of collections; Lack of written agreement.

Question 11

What types of property can be used for Article 9 (UCC) security interests?

Answer 11

Personal property, fixtures, and goods.

Question 12

Define secured party.

Answer 12

The creditor who has a security interest in the debtor’s collateral. Can be a seller or lender.

Question 13

Define creditor.

Answer 13

The creditor who has a security interest in the debtor’s collateral. Can be a seller or lender.

Question 14

Define debtor.

Answer 14

The party who is pleading property to secure a loan from a creditor/secured party.

Question 15

Define security interest.

Answer 15

The interest in the collateral held by the secured party and owned by the debtor that secures payment or performance of an obligation.

Question 16

Define security agreement.

Answer 16

The agreement between the debtor and secured party that creates or provides for a security interest.

Question 17

Define collateral.

Answer 17

The debtor’s property that is the subject of the security interest.

Question 18

Define financing statement.

Answer 18

Referred to as a UCC-1 form, this document is the required written proof of the security interest and description of the collateral and is usually filed to give public notice to third parties of the secured party’s interest.

Question 19

Define consumer goods.

Answer 19

Used or bought primarily for personal, family, or household purposes.

Question 20

Define equipment.

Answer 20

Used or bought primarily for use in a business and not part of inventory or farm products.

Question 21

Define farm products.

Answer 21

Crops and livestock, or supplies produced in a farming operation, such as ginned cotton, milk, eggs, or maple syrup.

Question 22

Define inventory.

Answer 22

Held by a debtor for sale under a contract of service or lease, or raw materials held for production and work in progress.

Question 23

Define fixtures.

Answer 23

Personal property that becomes so attached or so related to realty that an interest in them arises under real estate law.

Question 24

Define accessions.

Answer 24

Personal property that is so attached, installed, or fixed to other personal property that they become part of the goods.

Question 25

What are the five requirements for attachment of a security interest?

Answer 25

Writing or record; signed or authenticated by the debtor; interest in the collateral; value; underlying debt.
There is no attachment of a security interest until all five requirements are met.

Question 26

What is perfection of security interest?

Answer 26

Perfection is a means for the creditor to obtain priority over other security interests.

Question 27

What are the four methods of perfection under UCC Article 9?

Answer 27

Filing; Possession; Automatic; Temporary.

Question 28

What are the two generic places for filing?

Answer 28

Local - filing is for fixtures and extractions; county recorder.
Central - all other type of collateral; state where the collateral is located.

Question 29

What are the other types of interests that attach to the same types of properties under secured transactions?

Answer 29

Judicial lien; Statutory lien (mechanic’s lien); Statutory lien (service or artisan’s lien); Garnishment.

Question 30

What is a judicial lien?

Answer 30

A court orders certain property to be made available to a party to satisfy a claim (judgment) the party has won in a case.

Question 31

What is a statutory lien (mechanic’s lien)?

Answer 31

Mechanic’s liens are liens that provide contractors and suppliers for real estate projects to assess a lien against the improved real property for payment for their services or supplies.

Question 32

What is a statutory lien (service or artisan’s liens)?

Answer 32

A service person who repairs or improves personal property is given legal rights in the personal property that was repaired or improved property in the form of an artisan’s lien until the owner pays for the repairs.

Question 33

What is garnishment?

Answer 33

A garnishment is a sort of lien against a debtor’s paycheck or financial accounts for payment of a judgment issued by court order.

Question 34

At what point does a debtor declare bankruptcy?

Answer 34

When debtors cannot pay their debts and the collateral is insufficient to pay creditors.

Question 35

What are example of prebankruptcy efforts?

Answer 35

Garnishment, composition agreements, and assignments for the benefit of the creditors.

Question 36

What is a composition?

Answer 36

A composition is a contract between the debtor and the debtor’s creditors, whereby the creditors agree to discharge the debtor’s debt upon payment. Usually, all of the creditors have agreed to take a certain percentage of the total amount the debtor owes to them. The benefit to creditors is that they may be able to receive more in repayment because of the bankruptcy costs and priorities

Question 37

What is an assignment for the benefit of creditors?

Answer 37

This process involves an insolvent debtor voluntarily transferring certain assets to a trustee or assignee. The trustee or assignee liquidates the assets and tenders a payment on a pro rata basis in satisfaction of that debt to each creditor.

Question 38

What are the types of bankrupcty?

Answer 38

Chapter 7, 9 ,11, 12, and 13
7, 11, and 13 are the most common.

Question 39

Describe Chapter 7 bankruptcy.

Answer 39

Also known as a straight or liquidation bankruptcy. The standard is the ability to pay debts as they come due. A trustee is appointed. There are two types - voluntary & involuntary.

Question 40

Describe Chapter 11 bankruptcy.

Answer 40

A Chapter 11 bankruptcy allows for the reorganization of a business debtor to pay debts. Permits voluntary & involuntary petitions. Generally no trustee.

Question 41

Describe Chapter 13 bankruptcy.

Answer 41

Allows for the adjustment of debts of an individual with regular income. Permits only voluntary petitions. Always has a trustee.

Question 42

Define insolvency.

Answer 42

The inability to pay debts as they become due.

Question 43

Define “order for relief” or “stay”.

Answer 43

“Order for relief” or “stay” means that creditors must stop collection and all pending credit proceedings (lien foreclosure, judicial liens, litigation) are stayed (stopped), and the debts and payments will be handled through the bankruptcy court.

Question 44

Define voidable preference.

Answer 44

Debtors sometimes try to conceal property through transfers. Such transfers will be examined by the trustee. The trustee has the power to set aside transfers of the debtor’s property that occurred prior to the declaration of bankruptcy. These set-asides of transfers of property by the debtor are called voidable preferences.

Question 45

What are the two types of voidable preferences?

Answer 45

Transfers from the debtor to the creditor and transfers by the debtor to insiders of a business.

Question 46

List the order of priorities for distribution.

Answer 46

1. Secured parties
2. Domestic support
3. Administrative costs
4. Claims arising in the ordinary course of business
5. Employee wages
6. Contributions to EBPs
7. Claims of farm producers and fisherman
8. Consumer creditors
9. Claims of government units for various taxes
10. Claims for death or personal injury
11. All general unsecured creditors