Suretyship rights of parties

Question 1

Question #3 (AICPA.941130REG-BL)
Which of the following rights does a surety have?

I. Right to compel the creditor to collect from the principal debtor II. Right to compel the creditor to proceed against the principal debtor’s collateral

   I               II
Yes          Yes 
Yes          No 
No 	         Yes 
No 	         No

Answer 1

No No
A surety is primarily liable on a debt upon debtor’s default. If the creditor wishes to collect from the surety, the creditor may do so. The surety may not compel the creditor to take either of these actions.

Yes Yes
A surety is primarily liable on a debt upon debtor’s default. If the creditor wishes to collect from the surety, the creditor may do so. The surety may not compel the creditor to take either of these actions

Question 2

Which of the following acts will always result in the total release of a compensated surety?

A. The creditor changes the manner of the principal debtor’s payment.
B. The creditor extends the principal debtor’s time to pay.
C. The principal debtor’s obligation is partially released.
D. The principal debtor’s performance is tendered.

Answer 2

D. The principal debtor’s performance is tendered.

Tender of full performance will totally release the surety, as in such a case there is no longer a debt to be repaid by anyone.

Wrong Answer

C. The principal debtor’s obligation is partially released.
A partial release will not dissolve the surety’s responsibility because there is still some obligation remaining. Only a total release of the debtor will totally release the surety, because in such a case there is no longer a debt to be repaid by anyone.

Question 3

Which of the following defenses would a surety be able to assert successfully to limit the surety’s liability to a creditor?

A. A discharge in bankruptcy of the principal debtor.
B. A personal defense the principal debtor has against the creditor.
C. The incapacity of the surety.
D. The incapacity of the principal debtor.

Answer 3

C. The incapacity of the surety.

When a surety loses capacity, the surety can usually avoid liability. Many legal obligations are therefore extinguished, including obligations taken on as a surety.

Wrong Answer

B. A personal defense the principal debtor has against the creditor.

A personal defense of the debtor against the creditor is not available to the suret