P A R T P A R T Credit Introduction to Credit and Secured Transactions Security Interests in Personal Property Bankruptcy 6 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Introduction to Credit and Secured Transactions PA E TR HC 28 “Creditors have better memories than debtors.” Benjamin Franklin, Poor Richard’s Almanac (1758)

Learning Objectives  The meaning of a secured transaction  Suretyship and guaranty  Liens on personal property  Security interests in real property  Mechanics and materialman’s liens

 In this course, credit refers to transactions in which goods are sold, services are rendered, or money is loaned  Most transactions are unsecured: a service was rendered or goods sold and consumer- debtor promises to pay a bill  To minimize risk, creditors may require a lien (security interest) on debtor’s property Overview

 If a debtor defaults on an unsecured credit transaction, creditor may send notices to pay and eventually file suit for payment  If a debtor defaults on a secured credit transaction, creditor has several options  Rights and liabilities depend on the security device used: surety, guaranty, lien, or mortgage If Consumer Fails to Pay

 A surety is jointly liable for payment of another’s debt or performance of a duty  Creditor can demand performance from the surety at the time debt is due  A guaranty contract is similar, but guarantor does not join principal debtor in a promise, but makes a separate promise to be liable only after principle debtor defaults  Guarantor is secondarily liable Surety & Guaranty

 Creditor must disclose any material facts about the risk involved to the surety  A surety may use defenses to a creditor’s demand for payment that principle debtor would have under the primary contract  If surety performs or pays principal’s obligation, the surety acquires all rights creditor had against principal (subrogation) Surety’s Rights

 A lien is a security interest in or claim on personal property  Some liens (e.g., artisan, innkeeper, common carrier) are created by improvement to goods or provision of services concerning the goods  See Aircraft Repair Services v. Stambaugh’s Air Service, Inc.  State law provides procedures to foreclose a lien ( foreclosure ) Security for Personal Property

 Contract devices for real estate as security for an obligation: (1) real estate mortgage, (2) deed of trust, and (3) land contract  Materialmen and mechanics who furnish labor or materials to improve real estate have right to a lien until they are paid Security for Real Property

 Mortgage: security interest in real property given by an owner ( mortgagor ) as security for a debt owed to creditor ( mortgagee )  Mortgagor can sell the property interest without mortgagee’s consent, but sale does not affect mortgagee’s property interest  If mortgagor defaults, mortgagee may foreclose in accordance with state law The Mortgage

 A deed of trust is another mechanism for a security interest in real property  Generally, treated like a mortgage  A land contract secures the balance due seller for the purchase of real estate  An installment contract for a land purchase Deed of Trust & Land Contract

Test Your Knowledge  True=A, False = B  A guarantor is primarily liable for debtor’s obligation, and the creditor can demand performance from the guarantor at the time the debt is due.  Since a surety is not the principle debtor, it has no defenses available in response to a creditor’s demand for payment.  A plumber may file a security interest on a house until she is paid for her work

Test Your Knowledge  True=A, False = B  A creditor must disclose to a surety all information about the risk involved in a particular debtor, including whether the debtor business is likely to be successful  Foreclosure means that the mortgagor’s rights to the property are terminated.  A mortgage is a security interest in (or deed to) personal property

Test Your Knowledge  Multiple Choice  Bob Builder contracted with Joe Homes to build a house. Bob hired Ken Carpenter, who built the kitchen cabinets, but Bob refused to pay Ken. What should Ken do?  (a) Ken may file a lien on Joe’s real property  (b) Ken may file a mortgage on Joe’s property  (c) Ken may sue Bob and Joe for redemption  (d) Ken may foreclose on Bob for payment

Test Your Knowledge  Multiple Choice  Which two statutory systems permit one who furnishes labor or materials to improve real estate to claim a lien until they are paid?  (a) The Torrens and Priority systems  (b) The Pennsylvania and New York systems  (c) The New York and New Jersey systems  (d) None of the above

Thought Questions  What are the advantages and disadvantages of credit?  How does credit affect your life?  Do you have any secured credit?