Ch 8: Suretyship and Creditors' Rights Flashcards
What is a guarantor of collectibility?
- One who binds himself in writing to perform upon default of another, and
- Creditor must exhaust remedies against debtor before collecting from surety (guarantor of collection)
Generally, is a writing required in order for a surety to be liable?
Yes. A surety promise is required to be evidenced by a writing under the Statute of Frauds.
Staute of Frauds (R6): MYLEGS
Difference between Gratuitous Surety and Compensated Surety
- Gratuitous Surety:
- not compensated
- ex: parent signing for child’s loan
- treated more favorably, if any varies the surety’s risk, then the surety is discharged
- consideration: the creditor’s performance to the principal
- to be binding, the surety’s promise must be a condition of the creditor’s making the loan
- generally, a surety’s promise made after the loan contract has been made will not bind the gratuitous surety due to lack of consideration
- Compensated Surety:
- paid surety
- ex: a bonding company
- treated less favorably b/c in order to discharge a surety,the creditor must make a material change in the contract that increases the surety’s risk of loss
- consideration: compensation
- thus, a compensated surety is bound to perform regardless of the timing of the promise
List the surety’s rights against the creditor (lender)
Practically none.
- No right of notice
- No right to compel collection (force creditor to collect from debtor)
- No right to compel creditor to apply security held (to reduce the debt before proceeding against surety)
What are the surety’s rights against the principal (debtor)?
Before surety pays:
- Exoneration (right to compel principal to pay)
After surety pays:
- Subrogation (enforcement of creditors’ rights against principal)
- Reimbursement (right to recover from principal after surety pays)
What are surety’s rights against co-sureties?
Before surety pays:
- Exoneration (right to compel co-sureties to pay pro rata share)
After surety pays:
- Contribution (right of paying co-surety to collect from other co-surety the share of payment that the co-surety should have been paid)
What are some potential defenses of a surety?
- Forged signature
- Defrauded principal
- the principal (debtor) was induced to enter into this contract by the creditor’s fraud
- Duress upon principal
- Illegality of the principal’s obligations
- Nonperformance by creditor
- Impossibility
- Discharge of principal’s obligation
- payment and tender of payment
- release of principal debtor
- Covenant not to sue
- Variations of the surety’s risk (gratuitous vs. compensated surety)
When the surety has no defense against creditor
- principal’s fraud or duress upon surety
- ex: if the surety has been induced to enter the suretyship through the fraud or duress of the principal (debtor), then the surety does not have defense against an innocent creditor
- incapacity of principal
- bankruptcy of principal
Creditor’s rights outside of a suretyship:
What may the debtor do when they owe a creditor money and the debtor does have not sufficient funds to pay?
- file a petition in bankruptcy
- enter into a creditor’s composition
- assignment for the benefit of creditors
Creditor’s rights outside of a suretyship:
What is a creditor’s composition?
- when a debtor has insufficient funds to pay all of his creditors, the debtor and two or more creditors can enter into a creditor’s composition
- a composition is an agreement between the debtor and at least 2 creditors that the debtor pays the creditors less than their full claims in full satisfaction of their claims
- results in the debtor being discharged in full
Creditor’s rights outside of a suretyship:
What is the assignment for the benefit of creditors?
- an option when a debtor has insufficient funds to pay all of his creditors
- the debtor transfers some or all of his or her property to a trustee, who disposes of the property and uses the proceeds to satisfy the debtor’s debts
- the debtor is not discharged from unpaid debts, since the creditors do not agree to any discharge
Creditor’s rights outside of a suretyship:
Describe a judicial lien and a garnishment.
- judicial lien: if a debtor is adjudged to owe a creditor money and the judgement has gone unsatisfied, the creditor can request the court to impose a lien on specific property owed and possessed by the debtor
- after the court imposes a line, it will issue a writ of attachment, to seize property, sell it, and turn over the proceeds to the creditor
- garnishment: where the debtor is adjudged to owe the creditor money and the debtor has property in the hands of a 3rd party, a writ of garnishment may be sought
- orders the person holding the property to turn it over to the creditor or be held personally liable for the value of the property not turned over
- federal law provides that social security payments are not subject to garnishment
Creditor’s rights outside of a suretyship:
May a debtor’s Social Security payments be garnished?
No, Social Security payments are not subject to garnishment under federal law.
Creditor’s rights outside of a suretyship:
What assets are exempt from judicial liens and garnishments?
- homestead exemption
- personal injury awards
- limit the amount of an employee’s wages that may be garnished
Creditor’s rights outside of a suretyship:
The Fair Debt Collection Practices Act prevents a creditor who is owed money from calling the debtor before 8 am or after 9 pm. True or False?
False, The Fair Debt Collection Practices Act applies to debt collection agencies; it does not apply to a creditor trying to collect a debt owed to the creditor.
