Suretyship and Creditors' Rights

Question 1

Suretyship Obligation

Answer 1

Surety is one who is liable for the debt or obligations of another. It involves 3 parties: creditor (lendor), principal (debtor) and the surety.

The statute of frauds requires written evidence of the promise to answer for the debt of another. A suretyship undertaking not evidenced by a written memo is unenforceable.

Surety = Primarily Liable
Guarantor = Secondly Liable

Question 2

Gratuitous Surety

Answer 2

is one who is not compensated for his promise to the creditor. if the creditor does anything that varies the gratuitous surety’s risk, the surety’s obligation is discharged. Generally, any compensation received AFTER the loan contract has been made will not bind the gratuitous surety due to lack of consideration.

Question 3

Compensated Surety

Answer 3

is one who is compensated for his promise to the creditor. Only changes by the creditor that materially increase the surety’s risk will release a compensated surety. Ex Bonding company
Here, surety is bound to perform regardless of timing of promise.

Question 4

Surety’s Rights when debtor defaults:

Pass Key

Answer 4

1. when debtor defaults, creditor may do in any order:
   a. immediate demand from surety
   b. immediate demand from debtor
   c. immediately go after collateral.

A guarantor of collectibility would have the right to require a creditor to first proceed against the debtor or against available collateral.

Question 5

Surety Right of Exoneration

Before surety pays

Answer 5

If the debtor fails to pay, the surety may bring a suit for exoneration to compel the debtor to pay. The surety may do this prior to paying the creditor.

Question 6

Surety Right of Subrogation

After surety pays

Answer 6

Once the surety pays the creditor, the surety may enforce any right that the creditor had against the debtor. Ex: if the creditor was a secured creditor, the surety would gain the rights of a secured creditor upon payment.

Question 7

Surety Right of Reimbursement

After surety pays

Answer 7

The surety is entitled to reimbursement from the debtor for any amounts that the surety paid. This is also called the right of “indemnification”.

Question 8

Co-Sureties Rights

most Qs - b = pro rata share obligation

Answer 8

These are two or more “solvent” sureties of the same obligation. They are jointly and severally liable (any one or more may be liable for the entire obligation)

a. On payment, a surety is entitled to contribution from his co-sureties for their share of pmt.
* *b. Where co-sureties are obligated for varying amts by their agreements and debt is reduced by part pmt by principal. each co surety remains liable for original amt.
c. if co-surety obligation is discharged due to bankruptcy, her agreed share should not be considered in determining the pro-rata share of the remaining.

Question 9

Defenses of a Surety CPRS

Answer 9

C Creditor acting in bad faith: Fraud, Duress, Illegal
P Payment - already paid
R Release Debtor
S Surety lacks capacity or is bankrupted.

Question 10

Variations of Surety Risk

Answer 10

1. Alterations to Principal contract:
   a) Gratuitous Surety - any change releases surety
   b) Compensated Surety - material increase in risk releases surety
2. Extension of Time:
   a) Gratuitous Surety - any change releases surety
   b) Compensated Surety - material increase in risk releases surety
   c) but if the creditor does not agree to extend time, but rather merely delays in collection, no surety release.

Question 11

What is a creditor composition?

Answer 11

an agreement btw 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 12

Judicial Liens and Garnshiment

Answer 12

Creditor goes this route when their is no surety covering the debtor. It is more expensive and time consuming.

exception: most states make sure that debtor is protected to a certain point so that debtor doesnt become destitute. House, some of wages,

Question 13

Federal Fair Debt Collection Practices Act

Answer 13

Curts abuses by collection agencies. Doesnt apply to debtors collecting its own debt.

• can only contact 3rd parties to obtain whereabouts of the debtor, wo disclosing that they are a collection agency
• can only contact during convenient times 8am -9pm
• cant contact once an attorney has been hired
• cant use harassing or abusive language

Question 14

How do you stop a collection agency from calling you to collect?

Answer 14

By notifying the agency in writing that debtor will not pay the debt. Agency can only call again to communicate lawsuit or if seeking other remedies.