R5 M5 - Suretyship (notes)

Question 1

What is judicial lien (post-judgment)?

The creditor wins in court for the debtor to pay the creditors what it owed. If the debtor refuses to pay, then the creditor can request the court to impose a lien (which a right the court gives the creditor to possess property owned/ possessed by the debtor)

To impose a lien, the court will issue a writ, to the local sheriff to take possession or seize the property of the debtor and sell it and the money is given to the creditor.

Question 2

Which scenarios does a homestead exemption applies, and which scenarios does a homestead exemption does not apply ?

Answer 2

Homestead exemption Applies:
- A general creditor lends money to the debtor who refuses to pay, then the creditor cannot seize the house

Homestead exemption does not Apply:
- To a valid home mortgage lien ( PMSIs) Purchase money security interest in personal property or purchase money mortgages against real property.

-If you don’t pay your tax the government can go after your property.

Question 3

What is purchase money security interest?

When a creditor lends money to the debtor and the debtor uses that money to pay for a mortgage or a car (collateral). If you don’t pay the creditors. So, Homestead exemption does not apply.

if you fail to pay your mortgage than the bank can go after the house.

Question 4

Answer 4

Choice “B” is correct. Generally, a home mortgage lien is not subject to a state homestead exemption if it is a purchase money mortgage and neither is an IRS tax lien.

Question 5

What is a surety?

Answer 5

Someone who agrees to be liable for the debt of another person

Question 6

What is the difference between surety vs guarantors?

Answer 6

1) Surety is directly liable to the creditor or contract even though the debtor (principal) has not defaulted.

Guarantor is liable only if the debtor has defaulted on his debt

The creditor can go straight after the surety, if he chooses too. No notice of default is needed from the debtor

Question 7

What is subrogation?

Answer 7

Subrogation (after) is when the surety has paid the debtors debt in full to the creditor and now the surety can go after the debtor to reimburse him.

Question 8

What is exoneration?

Answer 8

Exoneration is done before the surety makes payment to the creditor. It’s a suit to force the debtor to pay the creditor especially when he has the money to pay the creditor and does not want.

Question 9

Reimbursement (indemnification)

Answer 9

This is done after payment of debt is done.

-Asked to be paid back after the surety paid the principal debt.

Question 10

What are Co-sureties?

Answer 10

Two or more sureties liable for the principal’s debt.

Question 11

Solvent Vs Insolvent

Answer 11

If no dollar amount is specified to what the four co-sureties owed in case creditor goes after them. The debt will be split equally (Pro-rata). For example, $100,000 each will owe $25,000

You can only get money from solvent surety.

Always use the settlement amount if the default amount differs from the settlement amount.

Question 12

When a co-surety is insolvent problem?

Answer 12

Question 13

Valid Defense of surety not to pay the creditor

Answer 13

-Creditor commits duress against the debtor
- The principal was tricked (induced) by to enter into a contract by the creditor’s fraud.

—-> illegal subject matter
—-> The principal has already paid
—-> The creditor released the debtor from his obligation to after the surety
—-> Surety can’t pay (bankruptcy)

Question 14

Gratuitous surety before or after contract

Answer 14

If the surety agrees to cover her son before the dealer sells the car which induce the dealer to sell the car, then there is a consideration. Meaning if the son’s defaults the dealer can go after the mom.

If the surety agrees to cover her son after the dealership made a deal with the son, then there is lack of consideration. Because the dealer was confident of the son financial capabilities, so if the son defaulted on his car loan, the dealer will not be able to go after the mom.

Question 15

Gratuitous surety Vs Compensated Surety

Answer 15

If the creditor wants to be nice and extend the time the principal owes him: This automatically:

• Discharges the gratuitous surety
• Compensated surety will have a hard time being discharged because he will have to materially prove how this increases his risk of debt

A delay of collection does not discharge. The surety will not be discharged.

Question 16

Answer 16

No Defense where surety must pay?

– Principal goes bankrupt

Question 17

What is a Creditor’s composition?

Answer 17

Agreement between the debtor and creditor to take less money in settlement.

If he owed $10,000, we the creditors have agreed he pays $2000 instead. Only the creditor who agreed to this. If he owes other creditors that have not agreed to settle, the debtor will still have to pay them

Question 18

What is an assignment for the Benefit of creditors?

Answer 18

This does not discharge the creditor for any unpaid debts

Question 19

Question 20

Judicial liens and Garnishment

What is judicial liens?

Answer 20

When the debtor owns property that you the creditor wants to go after

Garnishment —> The debtor’s property is in the hands of third parties

Question 21

Prejudgment Attachment

– Before court final judgment and you believe the debtor will not pay the creditor you can ask the judge provisionally to attach a property to the creditor as assurance. So, the judge will issue a ‘writ of attachment’ let the police be ready to seize the property in case the creditor wins his judgement

1) seize property
2) Sell it
3) Give proceeds to creditor

Question 22

Homestead Exemption

Answer 22

Most creditor will not be able to get the debtor house.

Homestead Exemption does not apply to the IRS

• This does not apply if you are paying mortgage to the bank (PMSI)

Question 23

Mechanic’s, Artisan lien’s & Material man’s lien’s

Mechanic or artisan automatically have a lien on the car they are fixing. If you don’t pay. This lien stays with the mechanic. If they return the property to the owner than the liens go away

Question 24

What are fraudulent conveyances (Bankruptcy law)

Answer 24

• Occurs when a debtor transfer property with the intent to hide your property from creditors when you file for bankruptcy because you don’t want the government to seize your goods to sell to satisfy disgruntled creditors.

Examples of fraudulent conveyances:

• Transfer to an insider (relative, business partner officer)

Question 25

Fair Debt Collection Practices Act (FDCPA)

Answer 25

This Act is like a referee just in case a collection agency abuses its power.

• Collection agencies can’t threaten you
• They can call your employer or family member to know your where about, but they can’t say they are a collection agency (8- 9pm)
• if you hire an attorney, they have to contact the attorney not you
  -If the collection agency violated this act the debtor can terminate that collection agency