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1. A lien creditor’s priority.
2. Prejudgment attachment and postjudgment writs of execution.
3. What property is exempt from levy of execution or attachment.
4. Suretyship and guaranty.
This chapter sets out the rights and remedies available to a creditor, when a debtor defaults, under laws other than UCC Article 9. Among those remedies are rights afforded by liens, surety and guaranty agreements, and guarantee agreements.
I. LAWS ASSISTING CREDITORS
A. LIENS IN GENERAL
A lien is a claim on a debtor’s property that must be satisfied
before the property is available to satisfy other creditor’s
claims. A lien has priority over an unperfected security interest.
Mechanic’s and artisan’s liens have priority over perfected
security interests.
B. MECHANIC’S LIEN
Can be placed by a creditor on real property when a person contracts
for labor, services, or material to improve the property but
does not pay.
1. When a Creditor Must File a Mechanic’s Lien
Within a specific time period, measured from the last date on
which materials or labor were provided (usually within 60 to
120 days).
2. If the Owner Does Not Pay
The property can be sold to satisfy the debt. Notice of the foreclosure
and sale must be given to the debtor in advance.
C. ARTISAN’S LIEN
A security device by which a creditor can recover from a debtor
for labor and materials furnished in the repair of personal property.
1. The Creditor Must Possess the Property
The lien terminates if possession is voluntarily surrendered,
unless the lienholder records notice of the lien in accordance
with state statutes.
2. If the Owner Does Not Pay
The property can be sold to satisfy the debt. Notice of the
foreclosure and sale must be given to the debtor in advance.
D. JUDICIAL LIENS
A debt must be past due before a creditor can commence legal
action. Once an action is brought, the debtor’s property
may be seized to satisfy the debt.
1. Attachment
Attachment is a court-ordered seizure and taking into custody
of property before the entry of a final judgment for a past-due
debt.
a. After a Court Issues a Writ of Attachment
A sheriff or other officer seizes nonexempt property. If the
creditor prevails at trial, the property can be sold to satisfy
the judgment.
b. Limitations
The due process clause of the Fourteenth Amendment limits a court’s
power to authorize seizure of a debtor’s property without
notice to the debtor or a hearing on the facts.
2. Writ of Execution
A writ of execution is an order, usually issued by the clerk
of the court, directing the sheriff to seize and sell any of
the debtor’s nonexempt property within the court’s geographical
jurisdiction.
a. First, the Creditor Must Obtain a Judgment against the Debtor
If the debtor does not pay, proceeds from the sale pay the judgment.
The debtor can redeem the property any time before it is sold.
b. Limitations
Because of laws that exempt a debtor’s homestead and designated
items of personal property, many judgments are uncollectible.
E. GARNISHMENT
Garnishment is when a creditor collects a debt by seizing property
of the debtor (such as wages or money in a bank account) that
is being held by a third party (such as an employer or a bank).
1. First, the Creditor Must Obtain a Judgment against the Debtor
The garnishment judgment is then served on a debtor’s employer
so that part of the debtor’s paycheck will be paid to the
creditor.
2. Limitations
In some states, a creditor must go back to court for a separate
order of garnishment for each pay period. Both federal and state
laws limit the amount of money that can be garnished from a debtor’s
weekly take-home pay. State limits are often higher.
F. CREDITORS’ COMPOSITION AGREEMENTS
A creditors’ composition agreement is a contract between
a debtor and his or her creditors for discharge of the debtor’s
liquidated debts on payment of a sum less than that owed.
G. MORTGAGE FORECLOSURE
A mortgagee can foreclose on the mortgaged property if the debtor
defaults. The usual method is a judicial sale. The proceeds are
applied to the debt.
1. Equity of Redemption
A mortgagor can redeem the property any time before the sale
(and, in some states, within a certain period of time after the
sale).
2. Deficiency Judgment
If the proceeds do not cover the foreclosure costs and the debt,
the mortgagee can recover the difference from the mortgagor by
obtaining a deficiency judgment (in a separate legal action after
the foreclosure).
H. ASSIGNMENT FOR THE BENEFIT OF CREDITORS
A debtor may transfer title to his or her assets to a trustee
or assignee, who sells them and pays each creditor in proportion
to the debt. Each creditor may accept (and discharge the debt)
or reject (and attempt to collect another way). Bankruptcy may
supersede the assignment (see Chapter 32).
II. SURETYSHIP AND GUARANTY
A. SURETYSHIP
Suretyship is a promise by a third person to be responsible for
a debtor’s obligation. Does not have to be in writing.
A surety is primarily liable—a creditor can demand payment
from the surety the moment the debt is due.
B. GUARANTY
A guaranty is a promise to be secondarily liable for the debt
or default of another. A guarantor pays only after the debtor
defaults and the creditor has made an attempt to collect from
the debtor. A guaranty must be in writing unless the main-purpose
exception applies (see Chapter 17).
C. DEFENSES OF THE SURETY AND THE GUARANTOR
To avoid payment, a surety (guarantor) may use the following
defenses.
1. Material Change to the Contract between Debtor and Creditor
Without obtaining the consent of the surety (guarantor), a gratuitous
surety is discharged completely and a compensated surety is discharged
to the extent he or she suffers a loss.
2. The Principal Obligation Is Paid or Valid Tender Is Made
The surety (guarantor) is discharged from the obligation.
3. Most of the Defenses of the Principal Debtor
Defenses that cannot be used: the debtor’s incapacity, bankruptcy,
and the statute of limitations.
4. A Surety or Guarantor’s Own Defenses
For example, fraud by the creditor to induce the surety (guarantor)
to guarantee the debt (such as the creditor’s failure to
inform the surety of facts that would substantially increase the
surety’s risk).
5. A Creditor’s Surrender or Impairment of the Collateral
Without the surety’s (guarantor’s) consent, releases
the surety to the extent of any loss suffered from the creditor’s
actions.
D. RIGHTS OF THE SURETY AND THE GUARANTOR
If the surety (guarantor) pays the debt—
1. Right of Subrogation
The surety (guarantor) may pursue any remedies that were available
to the creditor against the debtor.
2. Right of Reimbursement
The surety is entitled to receive from the debtor all outlays
made on behalf of the suretyship arrangement.
3. Co-Sureties’ Right of Contribution
A surety who pays more than his or her proportionate share on
a debtor’s default is entitled to recover from co-sureties.
III. PROTECTION FOR DEBTORS
A. EXEMPTIONS
1. Homestead
Each state allows a debtor to retain the family home (in some
states only if debtor has a family) in its entirety or up to
a specified amount.
2. Personal Property
Often exempt: household furniture up to a specified amount;
clothing and other personal possessions; a vehicle (or vehicles)
(up to a specified amount); certain animals, usually livestock
but including pets; and equipment that the debtor uses in a business
or trade.
B. SPECIAL PROTECTION FOR CONSUMER DEBTORS
A Federal Trade Commission rule limits the rights of a holder
in due course (HDC) who holds a negotiable promissory note executed
by a consumer as part of a consumer transaction (see Chapter 27).
Other laws include the Truth-in-Lending Act, which protects consumers
by requiring creditors to disclose certain information when making
loans (see Chapter 45).