Suretyship & Creditors' Rights

Question 1

a surety is

Answer 1

one who is liable for the debt or obligation of another

Question 2

Suretyship involves three parties:

Answer 2

the creditor (i.e., the obligee)
the principal (i.e., the debtor or obligor)
and
the surety

Question 3

The Statute of Frauds

Answer 3

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

Question 4

A gratuitous surety

Answer 4

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.

Question 5

A Compensated surety

Answer 5

is one who is paid for his promise to the creditor. Only changes by the creditor that materially increase the surety’s risk will release a compensated surety.

Question 6

Surety’s Rights:

When a debtor defaults in a suretyship situatio - Creditor may do any of the following in any order

Answer 6

a. Immediately demand payment from the surety.
b. Immediately demand payment from the debtor.
c. Immediately go after collateral if there is any. A general surety does not have the right to require the creditor to take any of these actions. But a guarantor of collectibility would have the right to require a creditor to first proceed against the debtor or against available collateral.

Question 7

Exoneration

Answer 7

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 8

Subrogation

Answer 8

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

Question 9

Reimbursemen

Answer 9

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 10

Co-sureties

Answer 10

are two or more sureties of the same obligation. Co-sureties are jointly and severally liable
(i.e., any one or more may be liable for the entire obligation).

Question 11

Fraud by the Creditor

Answer 11

The surety may use a defense that the debtor was induced into the debt agreement by the creditor’s fraud. The surety may not use fraud by the debtor to induce the surety into the debt agreement as a defense unless the creditor was aware of the fraud.

Question 12

Duress and Illegality

Answer 12

The surety is not liable if the debtor’s promise was obtained by duress or if the debtor’s obligation was illegal.

Question 13

Payment or tender of payment by the debtor or a third party is a

Answer 13

valid defense for a surety.

Question 14

Extension of Time

Answer 14

If creditor and debtor agree to extend the time of the debtor’s payment:

a. Any extension of time releases a gratuitous surety.
b. A compensated surety is released only if the extension of time materially increases the surety’s risk.

If the creditor does not agree to extend time, but merely delays in collection, the surety is not released.

Question 15

Personal Defenses of the Debtor

Answer 15

a. The surety may not use as a defense the debtor’s infancy, insanity or illegality. Those defenses are personal to the debtor.
b. The surety may use his own infancy, insanity, or bankruptcy as a defense.

Question 16

If is adjudged to owe a creditor money and the judgment has gone unsatisfied, the creditor can request the court to impose a lien on specific property owned and possessed by the debtor.

Answer 16

After the court imposes the lien, it will issue a writ (e.g., a writ of attachment), usually to the local sheriff, to seize property belonging to the debtor, sell it, and turn over the proceeds to the creditor.

With personal property liens, the lien usually attaches upon seizure of the property by the sheriff. If the property is real property, the lien usually attaches on the date the judgment is docketed by the court.

Question 17

If the debtor is adjudged to owe the creditor money and the debtor has property in the hands of a third party (e.g., money the debtor is owed by his employer, money in a bank account, debts owed to the debtor), a writ of garnishment may be sought.

Answer 17

a. The writ 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.
b. Federal law provides that Social Security payments are not subject to garnishment, execution, levy, or attachment.

Question 18

Federal Fair Debt Collection Practices Act (FDCPA)

Answer 18

1. The act curbs abuses by collection agencies in collecting consumer debts. The act does not apply to a creditor attempting to collect its own debts; just to services that collect consumer debts for others.

Question 19

Federal Fair Debt Collection Practices Act (FDCPA

Answer 19

The act severely restricts collection agencies’ ability to call third parties, such as relatives of the debtor, to indirectly pressure the debtor.

Question 20

Federal Fair Debt Collection Practices Act (FDCPA

Answer 20

The act also prohibits:

a. contacting the debtor at inconvenient or unusual times; in most cases, “convenient” times are between 8:00 am and 9:00 pm.
b. contacting the debtor directly if the debtor is represented by an attorney.
c. using harassing or abusive language in talking to the debtor.