Section 22: Debtor & Creditor Relationships (Suretyship) Flashcards
Suretyship
An arrangement in which a person agres to be answerable to a creditor for a claim against another person
Primary Surety
Person agrees to be a surety accomodation party or cosignor.
The creditor is permitted to treat them as the debtor and demand payment w/o any proof of default by the principal debtor
Secondary Surety
Person agrees to be a guarantor or endorser of a check or negotible instrument
The creditor can only demand payment if principal defaults
Last Resort Surety
Person agrees to be a conditional surety or guarantor of collection,
Creditor cannor demand payment until all means of collection have been exhausted
Surety is obligated to pay even if debtor…
- Lacks the capacity to make contracts
- Is discharged in bankrupcty from all debts
- Used fraud to induce the surety to amke their promise to the creditor
Suretys fall within the Statue of Frauds
Required that the promise be in writing and signed by the surety
The creditor must provide consideration, usually done at the creation of debt, so the loan itself is consideration
If surety is obtained later, the loan is past consideration and cannot be used to bind. In that case the creditor may pay the surety for their promise, and he compensation to the surety serves as consideration
Compensation Surety (Bonding Company)
is generally liable ont he debt unless the surety’s risk of loss is increased sue to a material change in the contract
Uncompensated Surety (Gratuitous Surety) (Signing a loan for your child)
is relieved anytime the creditor makes a change to the agreement
Surety rights upon demand for payment
- Offset - may offset amount demanded with amount credior owes the surety
- Exoneration - surety may sue the principal to compel them to make payment
Suerty rights AFTER payment is made
- Indemnification - surety has the right to demand reimbursement from the principal for amounts paid
- Subrogation - surety obtains all creditor claims against the debtor, including the right to collateral pledged by the debtor to the creditor
Surety is released from obligation if creditor:
Co-Surities
- Can obtain multiple sureties for debts
- Cosurety who pays debt has a right of contribtuion from the other cosureties
- Can put limits on their liabilites, therefore, only limited to portion of debt
- If a creditor releases a surety, the cosureties are released to the extent thy lose the right of contribtuion from the released one
Bankruptcy of Cosurety
Others are not released, and they will be liable as if the bankrupt party was never involved
Creditor Rights
- Composition of creditors - agreement in which creditors accept a proportionate amount as full settlement for their debts
- Assignment for the benefit of creditors - debtor voluntarily transfers assets to the trustee for the benefit of creditors, but the debtor still owes the debt
- Writ of Attachment - prejudical remedy in which a creditor is allowed to take possession of personal property of the debtor prior to getting a judgment for the past due debt
- Garnishment - permits the creditor to seize property of the debtor that is being held by a 3rd party
- Could include wges or money in bank
- Federal S.S. benefits are excluded
- Liens - claim against a debtor’s property that must be satisfied before the property is available to satisfy the claims of other creditors
- Consensual - mortgages or secured transactions
- Nonconcensual - judicial proceeding, mechanics’ leins, tax leins, artisans’ leins
- Must give notice before you sell the debtors property
- Credit Card Fraud Act (CCFA) - credit card holder ir protected from losses in excess of $50 due to unauthorized use of the holder’s c.c.
- Homestead Exemption - When going bankrupt, one can claim a certain amount of equity in their home as exempt property
- Debt Collectors - cannot harrass the debtor
