#7 Debtor and Creditor Relationships Flashcards

Question

What right does one co-surety generally have against another if they pay more than their share?

Answer 1

✅ **Contribution** When co-sureties are jointly liable, any one of them who pays more than their fair share of the debt can demand contribution from the others. * Example: If two co-sureties are each responsible for 50%, and one pays 100% of the debt, they can collect 50% from the other. 🟥 Not correct: Exoneration = surety forces debtor to pay creditor Subrogation = surety takes creditor’s rights against the debtor Reimbursement = surety demands repayment from debtor, not other sureties Key Tip: Contribution = co-surety to co-surety Reimbursement = surety to debtor Subrogation = surety steps into creditor’s shoes Exoneration = surety forces debtor to pay directly

Answer 2

It means the creditor must first try to collect from the person who owes the debt (the debtor) before going after the guarantor. **The guarantor is only responsible if the creditor tries and fails to get payment from the debtor.** This is called a guarantee of collection — the guarantor steps in only after collection efforts fail. 🟥 Contrast: If someone **signs a guarantee of payment**, the creditor can go straight to the guarantor without trying the debtor first. Key point: A guarantee of collection protects the guarantor by making the creditor exhaust all options with the debtor first.

Answer 3

✅ **Taking possession of the collateral gives the creditor the strongest position.** If the debtor defaults, the creditor already holds the collateral and can sell it without delay. This method both attaches and perfects the security interest automatically. 🟥 Other methods are weaker: Signed agreement only = valid against debtor, but not against others Financing statement filed = perfects the interest, but creditor still has to locate and seize the asset **Promise to give stock = not enforceable unless possession or proper control is established** Tip: Use the FAT mnemonic for the 3 ways to perfect a security interest: * Filing a financing statement * Automatic perfection (e.g., PMSI in consumer goods) * Taking possession of the collateral

Answer 4

❌ A bankruptcy trustee does **not have the power to avoid statutory liens or perfected security interests that were already in effect before the bankruptcy filing.** ✅ However, the trustee does have power to: * Take possession of the debtor’s property * Use any defenses the debtor could have used * Prevail over unperfected security interests Key Tip: The trustee steps into the debtor’s shoes — they can challenge weak claims, but must respect valid liens and perfected interests that existed before the bankruptcy was filed.

Answer 5

✅ **Security agreement** must be signed by the debtor. This agreement gives the creditor rights in the collateral and is required for the security interest to attach. To be valid, attachment requires: * Debtor has rights in the collateral * Value is given by the creditor * A signed security agreement (unless creditor has possession of the collateral) 🟥 Other documents — like: Statement of assignment Release of collateral Termination statement …are used by the creditor, and do not need the debtor’s signature. Key Tip: **Only the security agreement is part of creating the interest — the rest are about what happens afterward.**

Answer 6

Allowed defenses (surety is protected): * Creditor knew about fraud or lies used to get the surety to sign * Creditor changed the deal without the surety’s approval * Creditor released the debtor or collateral without telling the surety * Surety was tricked or pressured into signing (fraud or duress) * Surety lacked mental capacity to understand the agreement (this is called incapacity) * Debt was already paid, forgiven, or too old (statute of limitations ran out) Not allowed defenses (surety is still liable): * The debtor went bankrupt * The debtor was a minor or mentally unfit * The debtor lied to the surety, but the creditor didn’t know * The debtor had a defense, but the creditor wasn’t involved * The surety simply changed their mind or didn’t read the contract Sureties are only protected if they were misled, pressured, mentally unfit, or the creditor acted unfairly. The debtor’s problems don’t excuse the surety unless the creditor knew or was involved.

Answer 7

A financing statement must be filed to perfect a PMSI in **inventory** or **equipment.** Explanation: * PMSIs in inventory and equipment require filing a financing statement to be perfected. * For inventory, the filing must happen before the debtor receives the goods. * For equipment, filing is still required, but the timing rules are more flexible. Consumer goods (like personal jewelry or appliances) are different: PMSIs in consumer goods are automatically perfected—no filing needed. Other collateral types (like stocks, notes, or accounts) either don’t qualify for PMSIs or are perfected by possession or other means—not by PMSI filing. Key Rule: PMSI in inventory or equipment = file a financing statement PMSI in consumer goods = automatically perfected (no filing)

Answer 8

The secured party may **peacefully repossess the collateral** without judicial process. Under the UCC, if the debtor defaults and the creditor (secured party) has properly attached and perfected a security interest, the creditor can take back the collateral without going to court, as long as it’s done peacefully (no threats or force). The creditor can then sell the collateral in a public or private sale to recover the debt. Any extra proceeds after paying off the debt must go back to the debtor. Wrong Answer Clarifications: * A — The debtor is not required to deliver the collateral; the creditor must go get it. * C — The creditor must notify the debtor before selling. * D — The creditor can’t both keep the collateral and sue for a balance. If they keep it, that satisfies the debt—unless the debtor agrees otherwise. Key Rule: Upon default, a secured party may peacefully repossess collateral without court involvement and sell it to recover the unpaid debt.

Answer 9

Total A surety can recover from co-sureties based on each surety’s share of their maximum agreed liability, but only from co-sureties who are still legally liable (e.g., not discharged in bankruptcy). When multiple sureties back the same loan, and one ends up paying more than their fair share, they can seek contribution from the others. Here’s how: 1. Add up the maximum liability amounts for all sureties who are still legally obligated. 2. Find the percentage share of each liable co-surety. 3. Multiply each share by the total payment to determine how much each should contribute. 4. The paying surety can collect the difference from any who underpaid. Example: Three co-sureties agree to guarantee a loan: * Surety A: Max liability = $240,000 * Surety B: Max liability = $160,000 * Surety C: Max liability = $80,000 (but later discharged in bankruptcy) Only A and B remain liable. Their total max liability = $240,000 + $160,000 = $400,000 * A’s share = 60% * B’s share = 40% If A pays $140,000 to cover the borrower’s default, A can recover 40% of $140,000 = $56,000 from B. Key Rule: A surety can seek contribution based on the remaining liable co-sureties’ agreed limits. Discharged sureties are excluded from the calculation.o-surety limits: * Rivers: $240,000 * Clark: $80,000 (discharged in bankruptcy) * Zane: $160,000 * Total = $480,000 (but only $400,000 is collectible from Rivers and Zane) Clark’s bankruptcy removes him from contribution, so only Rivers and Zane share the burden. **Rivers pays the outstanding $140,000. * Rivers is responsible for 60% (240k ÷ 400k) * Zane is responsible for 40% (160k ÷ 400k)** **Zane owes Rivers 40% of $140,000 = $56,000** Key Rule: Co-sureties owe each other contribution based on their agreed maximum liability—but only if they’re still legally obligated (not discharged in bankruptcy).

Answer 10

Because an unsecured creditor is getting more than they would have received in bankruptcy, while a secured creditor is only getting what they were already guaranteed. Explanation: In bankruptcy, the goal is to treat unsecured creditors fairly by dividing remaining money equally. If you pay one unsecured creditor before filing, that person jumps the line — they got 100% while others might get far less. That’s called a preferential transfer. But a secured creditor (someone with collateral) is already protected. If you pay them, they don’t get extra — they just get what they were always legally entitled to. If you didn’t pay them, they would have taken the collateral anyway. So paying them early isn’t unfair and not considered a preference. Key Rule: Giving an unsecured creditor more than their fair bankruptcy share = preference. Paying a secured creditor what they were already owed = not a preference.

Answer 11

**Because giving the security interest after the loan was already made creates a voidable preference if it happens within 90 days before bankruptcy.** Explanation: If a borrower gives a security interest after already receiving a loan (called “antecedent debt”), it can be seen as favoring one creditor over others, especially if it happens close to filing for bankruptcy. Under the Bankruptcy Code: * Any transfer of property (like granting a security interest) * Made to pay or secure an old debt * Within 90 days before filing → Can be voided by the trustee as a preferential transfer. In this case, Roe gave Jet a security interest on June 15, but the loan happened way back on April 1. That means the collateral was given after the debt already existed, and it happened within 90 days of filing (July 1). That makes it a preference. Key Rule: A security interest given after the loan is made, and within 90 days of bankruptcy, can be set aside as a preferential transfer — even if the loan helped the business.

Answer 12

**If the business is not paying its debts as they come due, creditors can force it into bankruptcy.** Explanation: Under federal bankruptcy law, creditors can file an involuntary petition against a business if: * The business misses payments on multiple debts * The debts are undisputed and valid * The number of creditors meets the rules (1 creditor if fewer than 12 total; 3 if 12 or more) It doesn’t matter if the business prefers Chapter 11 or argues about the number of creditors — if it’s clearly not paying its bills, the court can allow Chapter 7 liquidation. Key Rule: Missed payments alone are enough to justify an involuntary bankruptcy under Chapter 7

Answer 13

Chapter 7 – Liquidation: * Assets are sold off to pay creditors * Used when the business is shutting down or the person can’t repay debts * Debts are wiped out (with some exceptions) * Business usually closes for good * Quick process, but debtor loses most non-exempt property Chapter 11 – Reorganization: * Business stays open and creates a court-approved payment plan * Used by companies (and some individuals) who want to restructure debt * Assets are mostly kept * Creditors vote on the plan * Takes longer and involves more court oversight Key Rule: Chapter 7 = shut down and sell everything. Chapter 11 = stay open and reorganize to repay over time.

Answer 14

**A trustee is appointed to handle the bankruptcy estate** **An automatic stay goes into effect to stop collection actions** Once a court accepts a Chapter 7 bankruptcy petition (whether voluntary or involuntary): 1. The court appoints a trustee to take control of the debtor’s assets, sell them, and distribute the money to creditors. 2. An automatic stay immediately stops all collection actions (calls, lawsuits, repossessions, garnishments, etc.). Creditors must wait for the bankruptcy process. These protections apply whether the debtor filed voluntarily or was forced into bankruptcy by creditors. Key Rule: Chapter 7 = Trustee takes over + collection efforts must stop automatically.

#7 Debtor and Creditor Relationships Flashcards

(38 cards)