Debtor-Creditor Relationships Flashcards
This is someone who promises to pay a creditor if a debtor defaults
Surety or Guarantor
The _______ requires a signed writing for a Surety’s promise to be enforceable
Statute of Frauds
T/F
For a Surety’s promise to be enforceable they can have the agreement either orally or in writing
FALSE
It must be in writing
If the Surety, Creditor, and Debtor are all created at the same time, what consideration is necessary?
Consideration is presumed present at that time
If the Surety comes in after the debtor/creditor relationship is created, what consideration is necessary?
Additional consideration must go to the Surety, otherwise the surety relationship is not enforceable
This right of a Surety is after a Surety pays the creditor in full and allows the Surety to get all of the Creditor’s rights, for example the Surety can go after the debtor or the collateral
Subrogation
This right of a Surety is after the debtor defaults and the Surety has the right to recover from the Debtor any money that the Surety had to pay the Creditor
Reimbursement
This right of a Surety is before the Debtor defaults and it allows a Surety to get a court order that the debtor pay, hoping to ‘scare’ the debtor into paying
Exoneration
T/F
Under the Surety’s right of Exoneration, once the Surety gets a court order that the debtor pay, the Surety is released from their duties and is no longer required to pay the creditor if the debtor defaults
FALSE
The Surety is hoping that they won’t have to pay, by obtaining the court order, but they will still be required to pay the Creditor if the Debtor defaults
What are Co-Suretors
Two or more sureties of the same debt
T/F
Co-Suretors must be notified of each other’s existence
FALSE
Co-Suretors do not necessarily have to know about each other
What right is unique to co-sureties?
The right of contribution
What is the right of contribution?
Once one co-suretor pays, they may receive a pro-rata share or contribution from all other co-suretors. Contribution is a unique right to co-sureties.
T/F
If a Co-Suretor goes through bankruptcy they still will not be exempt from their obligation to pay
FALSE
If a co-suretor’s obligation is discharged in bankruptcy, their dollar amount should not be considered in determining the pro rata share of the other co-suretors
What rights does a creditor have after the debtor defaults?
1) Immediately demand payment from the Surety
2) Immediately demand payment from the Debtor
3) Immediately go after collateral if there is any
T/F
When a debtor defaults, a credit must first go after the debtor before going after the surety
FALSE
A creditor may use their rights in any order - they can go straight for the Surety and bypass their right to demand payment from the debtor or to go after collateral
What is a Guarantor of Collection?
Also known as a Conditional Guarantor
This person promises to pay only after the creditor exhausts all remedies against the debtor. This is an exception to the Creditor’s right to exercise their rights in any order.
T/F
A Guarantor of Collection/Conditional Guarantor can be established as such either orally or in writing
FALSE
This must be put in writing
T/F
The Creditor does not have to give the guarantor of collection/conditional guarantor a notice when the debtor has defaulted. The creditor only contacts the Guarantor when they have exhausted all remedies against the debtor and it is now the guarantor’s time to pay
FALSE
The creditor must give notice of default to the guarantor of collection, otherwise the guarantor of collection is released from their obligations
What is the best defense for a Surety when they are added to an agreement later (Debtor, Creditor, and Surety are not all established at the same time)?
Lack of Additional Consideration
T/F
Lack of writing is not a good defense for a surety because a surety can be established orally
FALSE
Lack of writing is a good defense
T/F
Payment or tender of performance by the debtor is sometimes a good defense for a surety
FALSE
This is ALWAYS a good defense
Fraud by the ____ is a good defense for the Surety.
Fraud by the ____ is NOT a good defense, unless the ____ was aware of the fraud
Creditor
Debtor
Creditor
What defenses can a surety not use?
The Surety may not use defenses that are personal to the debtor, for example:
Infancy (Minor), Insanity, Bankruptcy, Death
T/F
Any action by the creditor which increases the risk of a Surety releases the surety to the extent of the increased risk
TRUE
What are the Creditor’s 2 Pre-Judgment Remedies?
1) Writ of Attachment
2) Pre-Judgment Garnishment
This puts a lien on the debtor’s property so it’s available if a judgment is obtained
a Writ of Attachment
This puts a lien on the debtor’s property or money that is in the hands of a 3rd party so the property is available to satisfy any judgment
Pre-Judgment Garnishment
What are the Creditor’s 2 Post-Judgment Remedies?
1) Writ of Execution
2) Garnishment
This is served by a sheriff on the debtor demanding payment of a judgment. If this is returned “unsatisfied” (perhaps the debtor wasn’t home) the creditor can levy on the debtor’s property and force a public sale
Writ of Execution
This is when the creditor collects money from the debtor’s wages or the debtor’s bank accounts
Garnishment
This is a phony transfer of property by the debtor to a 3rd party to stop creditors from attaching it. The 3rd party is expected to return the property to the debtor at a later time.
Fraudulent Conveyance
What are 3 indications of fraudulent conveyance?
1) Debtor remains in possession of the property
2) Debtor retains an equitable interest in the property (still has title)
3) Transfer was done secretly
This is an agreement between a debtor and creditor to discharge the debtor’s debts in return for a partial payment by the debtor
Composition of Creditors
Who is a composition of creditors binding on?
Only the creditors who agree to it. However, if a creditor does not agree to it, they may not get anything when/if the debtor declares bankruptcy. Better to get partial payment than nothing at all.
This is when a debtor transfers property to a trustee to pay creditors on a pro rata basis
Assignment for Benefit of Creditors
What are 2 Pros of an Assignment for Benefit of Creditors?
1) Doesn’t require the agreement of the creditors
2) Protects assigned property from attachment by other creditors
What is a Con of an Assignment for Benefit of Creditors?
It doesn’t discharge any of the debtor’s debts, simply gives them a way of dealing with paying off their debts (help of a trustee)
This act prohibits abusive, deceptive, and unfair debt collection by collection agencies
Fair Debt Collection Practices Act
T/F
The Fair Debt Collection Practices Act covers both the collection agencies and the original creditor
FALSE
This only covers collection agencies
The Fair Debt Collection Practices Act is enforced by who?
The Federal Trade Commission
Collection agencies are only liable for _____ liability, not ______ liability if they violate the Fair Debt Collection Practices Act
Civil
Criminal
This protects the Debtor’s equity in his residence from attachment by a creditor. It does not, however, provide protection against a mortgage or valid IRS tax lien
Homestead Exemption
T/F
Mortgagee or IRS can always put a lien on a property
TRUE
The Homestead Exemption does not apply to these two parties
What property is exempt from attachment or garnishment?
1) Homestead Exemption
2) Social Security Benefits
T/F
When the principal debtor is involuntarily petitioned into bankruptcy this will reduce a surety’s liability to the creditor
FALSE
This is a personal defense of the debtor but is not a defense for the surety
T/F
When the creditor fails to notify the surety of a partial surrender of the principal debtor’s collateral this will reduce a surety’s liability to the creditor
TRUE
The release or impairment of collateral injures a surety’s interest since a surety would acquire rights against the collateral upon paying off the debt. Accordingly, if collateral is released or impaired, then the surety’s obligation is reduced by the value of the collateral or by the amount of the impairment
T/F
When the creditor is adjudicated incompetent after the debt arose this will reduce a surety’s liability to the creditor
FALSE
This would make the debt voidable at the option of the creditor
T/F
When the principal debtor exerted duress to obtain the surety agreement this will reduce a surety’s liability to the creditor
FALSE
Although there is a possible wrong against the debtor this does not release the surety
T/F
A surety has the right to compel the creditor to collect from the principal debtor
FALSE
T/F
A surety has the right to compel the creditor to proceed against the principal debtor’s collateral
FALSE
T/F
If the principal debtor was discharged in bankruptcy, the surety can successfully limit their liability to a creditor
FALSE
The surety may use their own defenses of incapacity or bankruptcy to limit their liability. Additionally the surety may use most defenses that the debtor has to limit their liability, however the surety may not use the personal defenses of the debtor (such as the debtor’s bankruptcy or incapacity).
T/F
Any personal defense that the principal debtor has against the creditor will also limit the surety’s liability to a creditor
FALSE
The surety may use their own defenses of incapacity or bankruptcy to limit their liability. Additionally the surety may use most defenses that the debtor has to limit their liability, however the surety may not use the personal defenses of the debtor (such as the debtor’s bankruptcy or incapacity).
T/F
The incapacity of the surety will limit the surety’s liability to a creditor
TRUE
T/F
The incapacity of the principal debtor will limit the surety’s liability to a creditor
FALSE
The surety may use their own defenses of incapacity or bankruptcy to limit their liability. Additionally the surety may use most defenses that the debtor has to limit their liability, however the surety may not use the personal defenses of the debtor (such as the debtor’s bankruptcy or incapacity).
T/F
A non-compensated surety will be released from liability if the principal debtor’s obligations are released by the creditor with reservation of the creditor’s rights against the surety
FALSE
T/F
A non-compensated surety will be released from liability if the principal debtor and creditor modify their contract which will materially increase the surety’s risk of loss
TRUE
NOTE: a non-compensated surety is discharged even if the creditor does not change the surety’s risk. However, a compensated surety is discharged only if the modification causes a material increase in risk. IF the risk is not materially increased, the surety is not completed released but rather their obligation is reduced by the amount of loss due to modification. The surety is not released if the modifications are beneficial to the surety.
T/F
A non-compensated surety will be released from liability if the principal debtor is involuntarily filed in an involuntary petition of bankruptcy
FALSE
T/F
A non-compensated surety will be released from liability if the principal debtor was insane at the time the contract was entered into with the creditor
FALSE
T/F
The creditor changing the manner of the principal debtor’s payment will always result in the total release of a compensated surety
FALSE
The surety will not be released because this modification will not necessarily result in a material increase in the surety’s risk. It could even be beneficial to the surety.
T/F
The creditor extending the principal debtor’s time to pay will always result in the total release of a compensated surety
FALSE
The surety will not be released because this modification will not necessarily result in a material increase in the surety’s risk. It could even be beneficial to the surety.
T/F
The principal debtor’s obligation being partially released will always result in the total release of a compensated surety
FALSE
The surety will not be TOTALLY released. PARTIAL release of the principal debtor’s obligation will result in PARTIAL release of the surety.
T/F
The principal debtor’s performance being tendored will always result in the total release of a compensated surety
TRUE
