Ch 8: Suretyship and Creditors' Rights Flashcards Preview

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Flashcards in Ch 8: Suretyship and Creditors' Rights Deck (16):
1

What is a guarantor of collectibility?

  • One who binds himself in writing to perform upon default of another, and
  • Creditor must exhaust remedies against debtor before collecting from surety (guarantor of collection)

2

Generally, is a writing required in order for a surety to be liable?

Yes. A surety promise is required to be evidenced by a writing under the Statute of Frauds.

 

Staute of Frauds (R6): MYLEGS

3

Difference between Gratuitous Surety and Compensated Surety

  • Gratuitous Surety: 
    • not compensated
    • ex: parent signing for child's loan
    • treated more favorably, if any varies the surety's risk, then the surety is discharged
    • consideration: the creditor's performance to the principal
    • to be binding, the surety's promise must be a condition of the creditor's making the loan
    • generally, a surety's promise made after the loan contract has been made will not bind the gratuitous surety due to lack of consideration
  • Compensated Surety:
    • paid surety
    • ex: a bonding company
    • treated less favorably b/c in order to discharge a surety,the creditor must make a material change in the contract that increases the surety's risk of loss
    • consideration: compensation
    • thus, a compensated surety is bound to perform regardless of the timing of the promise

4

List the surety's rights against the creditor (lender)

Practically none.

  • No right of notice
  • No right to compel collection (force creditor to collect from debtor)
  • No right to compel creditor to apply security held (to reduce the debt before proceeding against surety)

5

What are the surety's rights against the principal (debtor)?

Before surety pays:

  • Exoneration (right to compel principal to pay)

After surety pays:

  • Subrogation (enforcement of creditors' rights against principal)
  • Reimbursement (right to recover from principal after surety pays)

 

6

What are surety's rights against co-sureties?

Before surety pays:

  • Exoneration (right to compel co-sureties to pay pro rata share)

After surety pays:

  • Contribution (right of paying co-surety to collect from other co-surety the share of payment that the co-surety should have been paid)

7

What are some potential defenses of a surety?

  • Forged signature
  • Defrauded principal
    • the principal (debtor) was induced to enter into this contract by the creditor's fraud
  • Duress upon principal
  • Illegality of the principal's obligations
  • Nonperformance by creditor
  • Impossibility
  • Discharge of principal's obligation
    • payment and tender of payment
    • release of principal debtor
    • Covenant not to sue
  • Variations of the surety's risk (gratuitous vs. compensated surety)

8

When the surety has no defense against creditor

  • principal's fraud or duress upon surety
    • ex: if the surety has been induced to enter the suretyship through the fraud or duress of the principal (debtor), then the surety does not have defense against an innocent creditor
  • incapacity of principal
  • bankruptcy of principal

9

Creditor's rights outside of a suretyship:

What may the debtor do when they owe a creditor money and the debtor does have not sufficient funds to pay?

  • file a petition in bankruptcy
  • enter into a creditor's composition
  • assignment for the benefit of creditors

10

Creditor's rights outside of a suretyship:

What is a creditor's composition?

  • when a debtor has insufficient funds to pay all of his creditors, the debtor and two or more creditors can enter into a creditor's composition
  • a composition is an agreement between the debtor and at least 2 creditors that the debtor pays the creditors less than their full claims in full satisfaction of their claims
  • results in the debtor being discharged in full

11

Creditor's rights outside of a suretyship:

What is the assignment for the benefit of creditors?

  • an option when a debtor has insufficient funds to pay all of his creditors
  • the debtor transfers some or all of his or her property to a trustee, who disposes of the property and uses the proceeds to satisfy the debtor's debts
  • the debtor is not discharged from unpaid debts, since the creditors do not agree to any discharge

12

Creditor's rights outside of a suretyship:

Describe a judicial lien and a garnishment.

  • judicial lien: if a debtor is adjudged to owe a creditor money and the judgement has gone unsatisfied, the creditor can request the court to impose a lien on specific property owed and possessed by the debtor
    • after the court imposes a line, it will issue a writ of attachment, to seize property, sell it, and turn over the proceeds to the creditor
  • garnishment: where the debtor is adjudged to owe the creditor money and the debtor has property in the hands of a 3rd party, a writ of garnishment may be sought
    • orders the person holding the property to turn it over to the creditor or be held personally liable for the value of the property not turned over
    • federal law provides that social security payments are not subject to garnishment

13

Creditor's rights outside of a suretyship:

May a debtor's Social Security payments be garnished?

No, Social Security payments are not subject to garnishment under federal law.

14

Creditor's rights outside of a suretyship:

What assets are exempt from judicial liens and garnishments?

  • homestead exemption
  • personal injury awards
  • limit the amount of an employee's wages that may be garnished

15

Creditor's rights outside of a suretyship:

The Fair Debt Collection Practices Act prevents a creditor who is owed money from calling the debtor before 8 am or after 9 pm. True or False?

False, The Fair Debt Collection Practices Act applies to debt collection agencies; it does not apply to a creditor trying to collect a debt owed to the creditor.

16

Creditor's rights outside of a suretyship:

The Fair Debt Collection Practices Act restricts the collection agency ability to do what?

  • may only call 3rd parties (i.e. the debtor's relatives)  to discover a debtor's whereabouts, but may not disclose that it is a collection agency or that the debtor owers debt
  • prohibits the agency to:
  • contact the debtor at inconvienct or unusual times
  • contacting the debtor directly if the debtor has a lawyer
  • using harassing or abusive language 
  • making false or misleading claims

 

Also, a debtor has the power to terminate the collection agency's contacts by notifying the agency in writing that the debtor will not pay the debt and to stop further communication.