Chapter 8 Section 1: Suretyship and Creditors' Rights

Question 1

Define surety

Answer 1

One who is liable for the debt or obligation of another

Question 2

Who are the three parties in a suretyship?

Answer 2

Creditor (lender/obligee), principal (debtor/obligor), and surety

Question 3

What is the primary difference between a surety and guarantor?

Answer 3

Surety is directly liable for the debt.

Guarantor is liable to the creditor only if the debtor does not perform his duty to the creditor

Question 4

Under what circumstance does a guarantor pay the debt?

Answer 4

After the creditor has exhausted all remedies against the debtor

Question 5

What does the statute of frauds say about suretyship?

Answer 5

It must be in writing (MYLEGS)

Question 6

What are the differences between gratuitous and compensated sureties?

Answer 6

Gratuitous is not compensated, any variation of their risk releases the surety, and the promise must be made before the loan contract has been finalized.
Compensated is paid, only a material change that increases the surety’s risk releases them, and the promise is binding, regardless of when it is made.

Question 7

What are the surety’s rights (or lack thereof)?

Answer 7

No right of notice
No right to compel collection
No right to compel creditor to apply security held

Question 8

What may a creditor do when a debtor defaults?

Answer 8

In any order:
Immediately demand payment from surety
Immediately demand payment from debtor
Immediately go after collateral, if there is any

Question 9

Define exoneration

Answer 9

A suit to compel payment. Made before the surety pays the creditor

Question 10

Define subrogation

Answer 10

Enforcement of creditor’s right against principal. Made after the surety pays

Question 11

Define reimbursement

Answer 11

Suit against principal after payment.

Also know as indemnification

Question 12

Define co-sureties

Answer 12

Two or more sureties of the same obligation

Question 13

In a situation with co-sureties, how is exoneration handled?

Answer 13

One surety may compel his co-sureties, through a lawsuit, to pay their pro rata shares of the debt

Question 14

Define contribution, in the context of co-sureties

Answer 14

After payment, a surety is entitled to contribution from his co-sureties on their share of the payment. If the contract does not specify the liability of each surety, they are liable for a pro rata share based on the number of solvent sureties.

Question 15

For contribution, what if one of the co-sureties is discharged in bankruptcy?

Answer 15

Their share should not be considered in determining the pro rata share of the remaining co-sureties.

Question 16

What are the defenses of surety?

CPRS

Answer 16

Creditor acted in bad faith
Payment and tender of payment
Release of principal debtor
Surety’s incapacity or bankruptcy

Question 17

For a compensated surety, what if there is a material increase in their risk due to a loss of security or release of co-surety?

Answer 17

It is a partial release.
For the security, discharge the surety in the amount of the value of the security released
For the co-surety, discharge the remaining to the extent that they could have recovered from the released security.

Question 18

What are not available to a surety as defenses?

Answer 18

Principal’s fraud or duress upon surety
Incapacity of principal
Bankruptcy of principal

Question 19

What are the two options a creditor has to alleviate debt aside from filing for bankruptcy?

Answer 19

Creditors’ composition

Assignment for the benefit of creditors

Question 20

Define creditors’ composition

Answer 20

An agreement between the debtor and at least two creditors that the debtor pays the creditors less than their full claims in full satisfaction of their claims

Question 21

Define assignment for the benefit of creditors

Answer 21

The debtor transfers some or all of his property to a trustee, who disposes of the property and uses the proceeds to satisfy the debtor’s debts

Question 22

How can creditors without security interest in the property gain rights in the property?

Answer 22

Imposition of a judicial lien or garnishment of property

Question 23

Define judicial lien

Answer 23

The court imposes a lien on specific property owned and possessed by the debtor. The police will take the property and sell it and give the creditor the proceeds

Question 24

Define garnishment

Answer 24

If the property is in the hands of a third party, a writ of garnishment is sought and the person holding the property has to turn it over

Question 25

What is a mechanic’s lien?

Answer 25

If a mechanic does repair work, still has the property they fixed, and you haven’t paid, they can keep the property until you pay.

Question 26

Define fraudulent conveyance and give a few examples

Answer 26

When a debtor transfers property with the intent to hinder, delay, or defraud creditors.
Transfer to an insider, debtor retained possession or control, transfer was concealed, value received by debtor was not reasonable

Question 27

What are the remedies for fraudulent conveyance?

Answer 27

It is void or voidable.

A creditor cannot repossess the property without legal process (no self-help)

Question 28

What does the Fair Debt Collection Practices Act set out to do?

Answer 28

Curb abuses by collection agencies. It does not apply to a creditor attempting their own debts - just to agencies that do it for others.

Question 29

If a debt collection agency is coming after you, how can you make them stop?

Answer 29

Tell them in writing that you wont’ be paying the debt.

Question 30

What damages are available under the Fair Debt Collection Practices Act?

Answer 30

Sue for actual damages, or a statutory $1,000 damage award