Flashcards in Chapter 8 Section 1: Suretyship and Creditors' Rights Deck (30):
One who is liable for the debt or obligation of another
Who are the three parties in a suretyship?
Creditor (lender/obligee), principal (debtor/obligor), and surety
What is the primary difference between a surety and guarantor?
Surety is directly liable for the debt.
Guarantor is liable to the creditor only if the debtor does not perform his duty to the creditor
Under what circumstance does a guarantor pay the debt?
After the creditor has exhausted all remedies against the debtor
What does the statute of frauds say about suretyship?
It must be in writing (MYLEGS)
What are the differences between gratuitous and compensated sureties?
Gratuitous is not compensated, any variation of their risk releases the surety, and the promise must be made before the loan contract has been finalized.
Compensated is paid, only a material change that increases the surety's risk releases them, and the promise is binding, regardless of when it is made.
What are the surety's rights (or lack thereof)?
No right of notice
No right to compel collection
No right to compel creditor to apply security held
What may a creditor do when a debtor defaults?
In any order:
Immediately demand payment from surety
Immediately demand payment from debtor
Immediately go after collateral, if there is any
A suit to compel payment. Made before the surety pays the creditor
Enforcement of creditor's right against principal. Made after the surety pays
Suit against principal after payment.
Also know as indemnification
Two or more sureties of the same obligation
In a situation with co-sureties, how is exoneration handled?
One surety may compel his co-sureties, through a lawsuit, to pay their pro rata shares of the debt
Define contribution, in the context of co-sureties
After payment, a surety is entitled to contribution from his co-sureties on their share of the payment. If the contract does not specify the liability of each surety, they are liable for a pro rata share based on the number of solvent sureties.
For contribution, what if one of the co-sureties is discharged in bankruptcy?
Their share should not be considered in determining the pro rata share of the remaining co-sureties.
What are the defenses of surety?
Creditor acted in bad faith
Payment and tender of payment
Release of principal debtor
Surety's incapacity or bankruptcy
For a compensated surety, what if there is a material increase in their risk due to a loss of security or release of co-surety?
It is a partial release.
For the security, discharge the surety in the amount of the value of the security released
For the co-surety, discharge the remaining to the extent that they could have recovered from the released security.
What are not available to a surety as defenses?
Principal's fraud or duress upon surety
Incapacity of principal
Bankruptcy of principal
What are the two options a creditor has to alleviate debt aside from filing for bankruptcy?
Assignment for the benefit of creditors
Define creditors' composition
An agreement between the debtor and at least two creditors that the debtor pays the creditors less than their full claims in full satisfaction of their claims
Define assignment for the benefit of creditors
The debtor transfers some or all of his property to a trustee, who disposes of the property and uses the proceeds to satisfy the debtor's debts
How can creditors without security interest in the property gain rights in the property?
Imposition of a judicial lien or garnishment of property
Define judicial lien
The court imposes a lien on specific property owned and possessed by the debtor. The police will take the property and sell it and give the creditor the proceeds
If the property is in the hands of a third party, a writ of garnishment is sought and the person holding the property has to turn it over
What is a mechanic's lien?
If a mechanic does repair work, still has the property they fixed, and you haven't paid, they can keep the property until you pay.
Define fraudulent conveyance and give a few examples
When a debtor transfers property with the intent to hinder, delay, or defraud creditors.
Transfer to an insider, debtor retained possession or control, transfer was concealed, value received by debtor was not reasonable
What are the remedies for fraudulent conveyance?
It is void or voidable.
A creditor cannot repossess the property without legal process (no self-help)
What does the Fair Debt Collection Practices Act set out to do?
Curb abuses by collection agencies. It does not apply to a creditor attempting their own debts - just to agencies that do it for others.
If a debt collection agency is coming after you, how can you make them stop?
Tell them in writing that you wont' be paying the debt.