1. Protecting the Creditor
CHAPTER THIRTY-SEVEN
Protecting the Creditor

2. The Right to Be Paid Creditors have an absolute right to be paid.
A debtor may have defenses, such as fraud.
Unsecured debt: a debt where repayment is based upon the debtor’s promise to repay
A creditor holding an unsecured debt has the following options for collection:
Contact the debtor and ask for repayment
Enlist the aid of a collection agency in collecting the debt
Sue the debtor and obtain a judgment, which allows the creditor to collect from the debtor’s assets
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3. The Right to Be Paid (continued)
If the creditor obtains a judgment:
The creditor can obtain a court order called a writ or an order of execution.
The writ or order of execution allows property to be seized by a sheriff or marshal and sufficient property to be sold to satisfy the judgment and expenses.
Bank accounts and money owed to the debtor can also be seized.
Courts can order that a debtor’s wages be garnished to obtain the funds to pay the debt.
This means that the employer would pay a portion of the debtor's wages directly to the creditor until the debt is paid.
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4. The Right to Be Paid (continued)
Secured debt: a debt in which the debtor pledges a particular piece of property as collateral for the debt
This claim against a particular piece of property by a creditor is referred to as a “security interest.”
You see this in everyday life when you buy an automobile on time – the loan to purchase the automobile is secured by the automobile.
If you don’t make the loan payments, the creditor can repossess the automobile and sell it to satisfy the loan.
If the sale doesn’t produce enough to cover the loan and expenses, the debtor can be sued for the difference.
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5. The Right to Be Paid (continued)
Usually, a secured loan arrangement must be in writing and signed by both parties.
The property used as collateral may either be:
Tangible, such as an automobile, or
Intangible, such as stocks, bonds, or accounts receivable.
Certain secured transactions require that the security interest be recorded in a public office.
For example, when giving a security interest in an automobile, the security agreement must be filed in either the county clerk’s office or with the state motor vehicle bureau.
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6. Other Methods of Protecting Creditors’ Rights
Suretyship: a promise by a third party outside the debtor-creditor relationship
The third party promises to pay if the debtor defaults (original debtor does not pay the loan).
The creditor may go the surety (the third party) for payment without first going to the debtor.
The surety may sue the debtor for any amount the surety had to pay to satisfy the debt.
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7. Other Methods of Protecting Creditors’ Rights (continued)
Guaranty: promise by a third party to be secondarily liable for another’s debt
The creditor must first seek payment from the debtor.
If the creditor cannot obtain payment from the debtor, only then will the creditor be able to look to the guarantor for payment of the debt.
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8. Remedies for Debtor’s Default
When the debtor does not make the required payments on a loan, the debtor is in default.
If the creditor has possession of collateral, the creditor may sell the property and keep the amount up to the amount owed plus expenses.
Any amount left over must be returned to the debtor.
If the sale proceeds don’t satisfy the debt, the creditor can sue the debtor for the additional amount owed.
If the debtor has the property, then the creditor may repossess the property.
Often the creditor may sell the property to cover the balance due plus expenses.
Any additional amount must be returned to the debtor.
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9. Security Interests Created by Law
Mechanic’s lien: a lien given to those who supply labor, materials, or services in the construction of buildings.
A lien can be placed against the building to ensure that all materials and services are paid for.
Tax lien: a tax lien given to the government for the non-payment of property taxes.
The taxing authority may sell the property to satisfy back taxes owed.
The law provides several opportunities to pay the taxes before the actual sale takes place.
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10. Security Interests Created by Law (continued)
Judgment lien: a lien granted to a creditor who has sued the debtor and obtained a judgment.
The creditor may sell the property to pay off the debt.
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11. Security Interests Created by Law (continued)
Artisan’s lien: a lien given to one who has performed labor on, or added value to personal property.
If the lien holder is holding property and payment is not made by the debtor, after giving notice to the debtor, the lien holder may sell the property to satisfy the debt.
Hotelkeeper’s lien: a lien that allows a hotelkeeper to keep and sell baggage of a guest who does not pay his or her bill.
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