R8-1 Flashcards
Which of the following events will release a noncompensated surety from liability to the creditor?
a.
The creditor was adjudicated incompetent after the debt arose.
b.
The principal debtor exerted duress to obtain the surety agreement.
c.
The creditor failed to notify the surety of a partial surrender of the principal debtor’s collateral.
d.
The principal debtor was involuntarily petitioned into bankruptcy.
Choice “c” is correct. A noncompensated surety will be discharged from liability if the principal debtor and the creditor modify the terms of the contract in any way. A partial surrender of the debtor’s collateral is a modification that will release a noncompensated surety from liability.
Choice “d” is incorrect. One of the reasons creditors seek sureties is to have someone who can pay the debt if the principal debtor goes bankrupt. Bankruptcy of the principal debtor will not discharge the surety.
Choice “a” is incorrect. The creditor becoming incompetent after the debt arose has no bearing on the liability of either the debtor or the surety.
Choice “b” is not as good an answer as “c”. The principal’s duress will discharge the surety’s obligation only if the creditor knew about the duress when the creditor accepted the surety.
Which of the following statements is(are) correct regarding debtors’ rights?
I.
State exemption statutes prevent all of a debtor’s personal property from being sold to pay a federal tax lien.
II.
Federal social security benefits received by a debtor are exempt from garnishment by creditors.
a.
Both I and II.
b.
I only.
c.
II only.
d.
Neither I nor II.
Choice “c” is correct. Federal law does not allow creditors to institute garnishment proceedings with respect to federal social security benefits.
Choice “b” is incorrect. Federal law, nor state law, controls what property is subject to federal tax liens.
Choice “a” is incorrect. Federal law, not state law, controls what property is subject to federal tax liens, and federal law does not allow creditors to institute garnishment proceedings with respect to federal social security benefits.
Choice “d” is incorrect. Federal law does not allow creditors to institute garnishment proceedings with respect to federal social security benefits, and federal law, nor state law, controls what property is subject to federal tax liens.
Which of the following liens generally require(s) the lienholder to give notice of legal action before selling the debtor’s property to satisfy the debt?
Mechanic’s lien
Artisan’s lien
a.
No
No
b.
No
Yes
c.
Yes
No
d.
Yes
Yes
Choice “d” is correct. A mechanic’s lien arises from improvements made on real property. An artisan’s lien arises from improvements made to personal property. Both require notice to the owner of the property in most states.
Which of the following acts always will result in the total release of a compensated surety?
a.
The creditor extends the principal debtor’s time to pay.
b.
The principal debtor’s obligation is partially released.
c.
The principal debtor’s performance is tendered.
d.
The creditor changes the manner of the principal debtor’s payment.
Choice “c” is correct. Tender of performance by the principal debtor completely releases the surety, even a compensated surety.
Choice “d” is incorrect. Changing the manner of payment will release a compensated surety only if the change increases the surety’s risk.
Choice “a” is incorrect. Changing the time of payment will release a compensated surety only if the change increases the surety’s risk.
Choice “b” is incorrect. Partially releasing the principal will only partially release the compensated surety.
When a principal debtor defaults and a surety pays the creditor the entire obligation, which of the following remedies gives the surety the best method of collecting from the debtor?
a.
Exoneration.
b.
Subrogation.
c.
Contribution.
d.
Attachment.
Choice “b” is correct. Subrogation is the right a surety has by which the surety succeeds to the creditor’s rights against the principal when the surety pays the principal’s obligations.
Choice “a” is incorrect. Exoneration is the right a surety has against the debtor to force the solvent debtor to pay a debt when the debtor refuses to do so.
Choice “c” is incorrect. Contribution is a right one surety has against the surety’s co-sureties to force them to pay their share of the debt.
Choice “d” is incorrect. Attachment is not a right of suretyship, but rather is a remedy with respect to the property of the debtor-principal.
Green was unable to repay a loan from State Bank when due. State refused to renew the loan unless Green provided an acceptable surety. Green asked Royal, a friend, to act as surety on the loan. To induce Royal to agree to become a surety, Green fraudulently represented Green’s financial condition and promised Royal discounts on merchandise sold at Green’s store. Royal agreed to act as surety and the loan was renewed. Later, Green’s obligation to State was discharged in Green’s bankruptcy. State wants to hold Royal liable. Royal may avoid liability:
a.
If Royal was an uncompensated surety.
b.
If Royal can show that State was aware of the fraudulent representations.
c.
Because the discharge in bankruptcy will prevent Royal from having a right of reimbursement.
d.
Because the arrangement was void at the inception.
Choice “b” is correct. Fraud on the surety by the principal debtor is not a defense unless the creditor knew of the fraud.
Choice “a” is incorrect. An uncompensated surety can be bound as long as the surety’s promise is made before consideration passed between the principal debtor and the creditor. Here, State renewed the loan in exchange for obtaining the surety. Thus, there is sufficient consideration to bind Royal.
Choice “c” is incorrect. Discharge in bankruptcy of the principal debtor does not discharge the surety.
Choice “d” is incorrect. Nothing in the facts makes the arrangement here void at the inception.
Wright cosigned King’s loan from Ace Bank. Which of the following events would release Wright from the obligation to pay the loan?
a.
King is granted a discharge in bankruptcy.
b.
Ace is paid in full by King’s spouse.
c.
Ace seeking payment of the loan only from Wright.
d.
King is adjudicated mentally incompetent.
Choice “b” is correct. Assuming that this is a suretyship situation and that Wright’s only obligation is as a surety, full payment of the underlying obligation discharges the surety.
Choice “c” is incorrect. Because nothing in the facts states that Wright signed only as a guarantor or guarantor of collection, Ace had no duty to first seek payment from King; so, Ace’s failure to first seek payment from King does not result in Wright’s discharge.
Choice “a” is incorrect. Discharge of the principal debtor for bankruptcy does not discharge a cosigner of a loan.
Choice “d” is incorrect. Incompetency of the principal debtor does not discharge a cosigner of a loan.
Under the Federal Fair Debt Collection Practices Act, which of the following would a collection service using improper debt collection practices be subject to?
a.
Reduction of the debt.
b.
Criminal prosecution for violating the Act.
c.
Abolishment of the debt.
d.
Civil lawsuit for damages for violating the Act.
Choice “d” is correct. The FDCPA gives parties injured by unfair collection practices the right to sue for damages. 15 USC 1692k(a)(1)
Choice “c” is incorrect. The FDCPA gives parties injured by unfair collection practices the right to sue for damages. It does not provide for abolishment of the debt.
Choice “a” is incorrect. The FDCPA gives parties injured by unfair collection practices the right to sue for damages. It does not provide for a reduction of the debt.
Choice “b” is incorrect. The FDCPA gives parties injured by unfair collection practices the right to sue for damages. It does not provide criminal penalties.
Which of the following actions between a debtor and its creditors will generally cause the debtor’s release from its debts?
~~Composition of creditors
~~Assignment for the benefit of creditors
a.
Yes
No
b.
Yes
Yes
c.
No
No
d.
No
Yes
Choice “a” is correct. A composition of creditors is an agreement between a debtor and at least two creditors that the creditors will take less than full payment to discharge the debts owed by the debtor to the creditors who participate in the composition agreement. The agreement results in discharge of the debts in full because a contract is created by the cross-promises of the parties (i.e., the cross-promises serve as consideration, so the pre-existing duty rule is avoided). On the other hand, an assignment for the benefit of creditors is a transfer of some or all of a debtor’s property to a trustee who then uses the property to pay the creditors. There is no discharge of debts here because the creditors have not entered into any contract to take less than full payment.
Which of the following prejudgment remedies would be available to a creditor when a debtor owns no real property?
~~Writ of attachment
~~Garnishment
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
Choice “a” is correct. A writ of attachment is an order by the court to a sheriff to seize a person’s property. The writ can apply to personal property and to real property, and so the writ can be used even when a person owns no real property. Garnishment is an order to a third person who holds property of the debtor to turn the property over to a creditor. The property involved usually are wages and/or other property owed by the third person to the debtor. There is no requirement that the property be the debtor’s real property.
Which of the following rights does a surety have?
~~Right to compel the creditor to collect from the principal debtor
~~Right to compel the creditor to proceed against the principal debtor’s collateral
a.
No
No
b.
No
Yes
c.
Yes
No
d.
Yes
Yes
Explanation
Choice “a” is correct. A surety generally is primarily liable on the debt the surety agrees to backstop and has no right to compel the creditor to collect from the principal debtor or to compel the creditor to proceed against the debtor’s collateral. (There is, however, a very limited right to both of these in certain circumstances.)
Ingot Corp. lent Flange $50,000. At Ingot’s request, Flange entered into an agreement with Quill and West for them to act as compensated co-sureties on the loan in the amount of $100,000 each. Ingot released West without Quill’s or Flange’s consent, and Flange later defaulted on the loan. Which of the following statements is correct?
a.
Flange will be released for 50% of the loan balance.
b.
Quill will be liable for 50% of the loan balance.
c.
Quill will be liable for the entire loan balance.
d.
Ingot’s release of West will have no effect on Flange’s and Quill’s liability to Ingot.
Choice “b” is correct. Release of a co-surety is treated the same as release of security. The release discharges the other co-sureties to the extent of the impairment of their rights. Had West not been released, Quill would have had a right of contribution against West for half of the debt. Thus, Quill is discharged to that extent.
Choice “c” is incorrect. Release of a co-surety is treated the same as release of security. The release discharges the other co-sureties to the extent of the impairment of their rights. Had West not been released, Quill would have had a right of contribution against West for half of the debt. Thus, Quill is discharged to that extent.
Choice “d” is incorrect. Release of a co-surety is treated the same as release of security. The release discharges the other co-sureties to the extent of the impairment of their rights. Had West not been released, Quill would have had a right of contribution against West for half of the debt. Thus, Quill is discharged to that extent.
Choice “a” is incorrect. A principal is not discharged from a debt merely because a surety is released.
A debtor may attempt to conceal or transfer property to prevent a creditor from satisfying a judgment. Which of the following actions will be considered an indication of fraudulent conveyance?
~~Debtor remaining in possession after conveyance
~~Secret conveyance
~~Debtor retains an equitable benefit in the property conveyed
a.
Yes
Yes
No
b.
Yes
Yes
Yes
c.
Yes
No
Yes
d.
No
Yes
Yes
Choice “b” is correct. Under the Uniform Fraudulent Conveyance Act, all three acts are indicia of a fraudulent conveyance.
A homestead exemption ordinarily could exempt a debtor’s equity in certain property from post-judgment collection by a creditor. To which of the following creditors will this exemption apply?
~~Valid home mortgage lien
~~Valid IRS Tax lien
a.
Yes
Yes
b.
No
No
c.
Yes
No
d.
No
Yes
Choice “b” is correct. Generally, a home mortgage lien is not subject to a state homestead exemption if it is a purchase money mortgage and neither is an IRS tax lien.
Which of the following methods will allow a creditor to collect money from a debtor’s wages?
a.
Order of receivership.
b.
Arrest.
c.
Mechanic’s lien.
d.
Writ of garnishment.
Choice “d” is correct. A writ of garnishment will allow a creditor to collect money from a debtor’s wages.
Choices “b” and “a” are incorrect. Neither the arrest of the debtor nor an order of receivership will allow a creditor to collect money from a debtor’s wages.
Choice “c” is incorrect. A mechanic’s lien is placed on property such as an automobile and will prevent the owner from transferring “clean” title without paying the mechanic’s lien. A mechanic’s lien does not, by itself, allow the creditor to collect money from a debtor’s wages.
