Chapter 20: "Creditors' Rights and Remedies" Flashcards
Types of Liens
MAJ
Mechanic’s lien- When a person furnishes material to improve real property and does not get paid. They can get a lien against that property.
Artisan’s lien – When you repair or improve personal property. Until you get paid, and as long as you keep the personal property, you have an artisan’s lien.
Judicial lien – When you haven’t been paid, when the debt is past due, you go to court (lawsuit) and get a judgment against someone. (Debt owed, plus interest, plus legal cost)
writ of attachment
A court’s order, prior to a trial to collect a debt, directing the sheriff or other officer to seize nonexempt property of the debtor; if the creditor prevails at trial, the seized property can be sold to satisfy the judgment.
writ of attachment
A court’s order, prior to a trial to collect a debt, directing the sheriff or other officer to seize nonexempt property of the debtor; if the creditor prevails at trial, the seized property can be sold to satisfy the judgment.
Article ___ of the Uniform Commercial Code creates various rights and remedies for creditors.
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mechanic’s lien
A statutory lien on the real property of another, created to ensure payment for work performed and materials furnished in the repair or improvement of real property, such as a building.
artisan’s lien
A possessory lien given to a person who has made improvements and added value to another person’s personal property as security for payment for services performed.
The difference between a mechanic’s lien and an artisan’s lien is that a mechanic’s lien involves personal property.
a. True
b. False
b. False
What type of law governs the procedures that must be followed to create a mechanic’s lien?
a. State law
b. Federal law c. Real estate law d. Mechanical law e. Municipal law
a. State law
Artisan’s liens usually take priority over other creditors’ claims to the same property.
a. True
b. False
a. True
When we say that an artisan’s lien is possessory, we mean that:
a. the owner has a right to repossess the personal property.
b. the owner has a right to the personal property. c. the lienholder must retain possession of the personal property.
c. the lienholder must retain possession of the personal property.
writ of execution
A court’s order, after a judgment has been entered against the debtor, directing the sheriff to seize (levy) and sell any of the debtor’s nonexempt real or personal property. The proceeds of the sale are used to pay off the judgment, accrued interest, and costs of the sale; any surplus is paid to the debtor.
attachment
(1) In the context of secured transactions, the process by which a security interest in the property of another becomes enforceable. (2) In the context of judicial liens, a court-ordered seizure and taking into custody of property prior to the securing of a judgment for a past-due debt.
attachment
(1) In the context of secured transactions, the process by which a security interest in the property of another becomes enforceable. (2) In the context of judicial liens, a court-ordered seizure and taking into custody of property prior to the securing of a judgment for a past-due debt.
An attachment occurs when property is seized and taken into custody after a judgment is obtained on a post-due debt.
a. True
b. False
b. False
The typical procedure for attachment is as follows:
The creditor files with the court an affidavit (a written statement, made under oath) stating that the debtor has failed to pay and indicating the statutory grounds under which attachment is sought.
The creditor must post a bond to cover at least the court costs, the value of the property attached, and the value of the loss of use of that property suffered by the debtor.
When the court is satisfied that all the requirements have been met, it issues a writ of attachment, which directs the sheriff or other officer to seize the debtor’s nonexempt property. If the creditor prevails at trial, the seized property can be sold to satisfy the judgment.
If the nonprevailing party refuses to pay the judgment after a lawsuit, the prevailing party may ____
seek a writ of exectuion
after winning a judgment, the prevailing party may return to court and petition for a writ of execution, which is a court order that directs the sheriff to seize and sell any of the debtor’s nonexempt property that is within the courts geographic jurisdiction. The proceeds of the sale are used to pay the judgment, accrued interest, and the cost of the sale.
Shawn brings a valuable watch to Teresa’s repair shop. Teresa’s assistant allows Shawn to take the watch without paying for the repairs. Teresa sues Shawn to recover payment and she asks the court to direct the sheriff to seize and take custody of the watch before the trial. Teresa is seeking a(n) _____
writ of attachment
Suretyship and Guaranty Relationships
When a third person promises to pay a debt owed by another.
Suretyship – primarily liable for the debt to the principal
Guaranty – secondarily liable, liable if the principal defaults.
Under the Statute of Frauds, a guaranty contract between the guarantor and the creditor must be in writing (or electronically recorded) to be enforceable.
(Exception – main purpose rule- the surety is for person who signed benefit)
Actions that Release Surety/Guarantor
Material Modification – change the terms of the original loan without the surety/guarantor consent
Surrender Property – if the CREDITOR reduces the value of the collateral, loan reduced by that amount.
Payment of Debt by principal releases surety
Personal property that is most often exempt from satisfaction of judgment debts includes the following:
- Household furniture up to a specified dollar amount.
- Clothing and certain personal possessions, such as family pictures or a Bible.
- A vehicle (or vehicles) for transportation (at least up to a specified dollar amount).
- Certain classified animals, usually livestock but including pets.
- Equipment that the debtor uses in a business or trade, such as tools or professional instruments, up to a specified dollar amount.
With a mortgage, the creditor is the
mortgagee
mortgagor
mortgagee
forbearance
The act of refraining from exercising a legal right. An agreement between the lender and the borrower in which the lender agrees to temporarily cease requiring mortgage payments, to delay foreclosure, or to accept smaller payments than previously scheduled.
creditors’ composition agreements
An agreement formed between a debtor and his or her creditors in which the creditors agree to accept a lesser sum than that owed by the debtor in full satisfaction of the debt.
prepayment penalty
A provision in a mortgage loan contract that requires the borrower to pay a penalty if the mortgage is repaid in full within a certain period.
short sale
A sale of real property for an amount that is less than the balance owed on the mortgage loan, usually due to financial hardship. Both the lender and the borrower must consent to a short sale. Following a short sale, the borrower still owes the balance of the mortgage debt (after the sale proceeds are applied) to the lender unless the lender agrees to forgive the remaining debt.
right of redemption
The right of a defaulting borrower to redeem property before a foreclosure sale by paying the full amount of the debt, plus any interest and costs that have accrued.
Mortgage lenders typically require a statement that the borrower will obtain insurance to cover the personal property that he or she plans to keep in the home.
a. True
b. False
b. False
Connie promises Mountain State Bank that he will be responsible for a loan taken out by her son, Madison. The agreement is such that at the moment the debt is due, Mountain State will demand repayment from Connie. This is known as a(n)
suretyship
The difference between a surety and a guarantor is that the creditor must exhaust all legal remedies against the principal debtor before holding the surety responsible for payment.
- hint
What is the difference between the two?
False
_______ requires that a guaranty contract between the guarantor and the creditor must be in writing or electronically recorded to be enforceable unless the main purpose rule applies.
Statute of Fraud
Actions That Release the Surety and the Guarantor
Material Modification
Making any material modification to the terms of the original contract—without the surety’s consent—will discharge the surety’s obligation. (The extent to which the surety is discharged depends on whether he or she was compensated and to what extent he or she suffered a loss from the modification. For example, a father who receives no consideration in return for acting as a surety on his daughter’s loan will be completely discharged if the loan contract is modified without his consent.)
Surrender of Property
If a creditor surrenders the collateral to the debtor or impairs the collateral without the surety’s consent, these acts can reduce the obligation of the surety. If the creditor’s actions reduce the value of the property used as collateral, the surety is released to the extent of any loss suffered.
Payment or Tender of Payment
Naturally, any payment of the principal obligation by the debtor or by another person on the debtor’s behalf will discharge the surety from the obligation. Even if the creditor refused to accept payment of the principal debt when it was tendered, the obligation of the surety can be discharged (if the creditor knew about the suretyship).
Defenses of the Surety and the Guarantor
Incapacity and Bankruptcy
Incapacity and bankruptcy are personal defenses, which can be asserted only by the person who is affected. Therefore, the surety cannot assert the principal debtor’s incapacity or bankruptcy as a defense. A surety may assert his or her own incapacity or bankruptcy as a defense, however.
Statute of Limitations
The surety cannot assert the statute of limitations as a defense. (In contrast, the principal debtor can claim the statute of limitations as a defense to payment.)
Fraud
If the creditor fraudulently induced the person to act as a surety on the debt, the surety or guarantor can assert fraud as a defense. In most states, the creditor has a legal duty to inform the surety, before the formation of the suretyship contract, of material facts known by the creditor that would substantially increase the surety’s risk. Failure to so inform may constitute fraud and renders the suretyship obligation voidable.
The Right of Reimbursement
The surety or guarantor has a right of reimbursement from the debtor. Basically, the surety is entitled to receive from the debtor all outlays made on behalf of the suretyship arrangement. Such outlays can include expenses incurred as well as the actual amount of the debt paid to the creditor.
The Right of Contribution
Two or more sureties are called co-sureties. When a co-surety pays more than her or his proportionate share on a debtor’s default, she or he is entitled to recover from the other co-sureties the amount paid above that surety’s obligation. This is the right of contribution. Generally, a co-surety’s liability either is determined by agreement or, in the absence of agreement, is set at the maximum liability under the suretyship contract.
Ashley agrees to act as a surety for Roshan. Roshan defaults on his loan and Ashley repays the bank because Roshan declared bankruptcy. Ashley now has a(an):
right of subrogation.
Luciano is a surety for a loan that Darmin does not pay. Luciano pays it in full. If Darmin does not declare bankruptcy, Luciano has a right of:
reimbursement.
As a surety, Luciano has the right of reimbursement against Darmin. Essentially, Luciano is entitled to receive from Darmin all outlays made on behalf of the suretyship agreement. Such outlays can include expenses incurred, as well as the actual amount of the debt paid to the creditor.
Because of the right of subrogation, any right that the creditor had against the debtor now becomes the right of the surety and includes all EXCEPT one of the following:
a. rights to collateral possessed by the creditor.
b. rights to judgments obtained by the creditor.
c. liabilities of the creditor.
d. creditor rights in bankruptcy.
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c. liabilities of the creditor.
