Chapter 23

Suretyship and Guaranty Parties

Principal Debtor Creditor

Guarantor (Secondary Liability to Creditor)Surety (Primary Liability to Creditor)

In a suretyship or guaranty arrangement, a third party promises to be responsible for a debtor’s obligations. A third party who agrees to be primarily liable for the debt (that is, liable even if the principal debtor does not default) is known as a surety; a third party who agrees to be secondarily liable for the debt (that is, liable only if the principal debtor defaults) is known as a guarantor. As noted in Chapter 12, normally a promise of guaranty (a collateral, or secondary, promise) must be in writing to be enforceable.

Chapter 23

Creditors’ Rights and Bankruptcy

REMEDIES AVAILABLE TO CREDITORS

Liens 1. Mechanic’s lien2. Artisan’s lien3. Innkeeper’s lien4. Judicial liens a. Attachment b. Writ of execution

Garnishment A collection remedy that allows the creditor to attach adebtor’s money (such as wages owed or bank accounts)and property that are held by a third person.

Creditors’CompositionAgreement

A contract between a debtor and his or her creditors bywhich the debtor’s debts are discharged by payment of asum less than the sum that is actually owed.

Chapter 23

Creditors’ Rights and Bankruptcy (Continued)

REMEDIES AVAILABLE TO CREDITORS

MortgageForeclosure

On the debtor’s default, the entire mortgage debt is due andpayable, allowing the creditor to foreclose on the realty by sellingit to satisfy the debt.

Suretyship orGuaranty

Under contract, a third person agrees to be primarily orsecondarily liable for the debt owed by the principal debtor. Acreditor can turn to this third person for satisfaction of the debt.

LAWS ASSISTING DEBTORS

Exemptions Numerous laws, including consumer protection statutes, assistdebtors. Additionally, state laws exempt certain types of real andpersonal property from levy of execution or attachment.

1. Real property2. Personal property

Chapter 23

Creditors’ Rights and Bankruptcy (Continued)

BANKRUPTCY-A COMPARISON OF CHAPTERS 7, 11, 12, AND 13

Issue Chapter 7 Chapter 11 Chapters 12 and 13

Purpose Liquidation Reorganization Adjustment

Who CanPetition

Debtor (voluntary) or creditors(involuntary).

Debtor (voluntary) orcreditors (involuntary).

Debtor (voluntary) only.

Who Can Be aDebtor

Any “person” (includingpartnerships and corporations)except railroads, insurancecompanies, banks, savings andloan institutions, investmentcompanies licensed by theSmall Business Administrationand credit unions. Farmers andcharitable institutions cannot beinvoluntarily petitioned.

Any debtor eligible forChapter 7 relief;railroads are alsoeligible.

Chapter 12 – Any familyfarmer …Chapter 13—Anyindividual…..

Chapter 23

Creditors’ Rights and Bankruptcy (Continued)

BANKRUPTCY-A COMPARISON OF CHAPTERS 7, 11, 12, AND 13

Issue Chapter 7 Chapter 11 Chapters 12 and 13

Procedure Leadingto Discharge

Nonexempt property is soldwith proceeds to bedistributed (in order) topriority groups.Dischargeable debts areterminated.

Plan is submitted; if it isapproved and followed,the remaining debts aredischarged

Plan is submitted and must beapproved if the debtor turns overdisposable income for a three-year period; if the plan isfollowed, debts are discharged.

Advantages On liquidation anddistribution, most debts aredischarged, and the debtorhas an opportunity for afresh start.

Debtor continues inbusiness. Creditors caneither accept the plan, orit can be “crammeddown” on them.Allowing forreorganization andliquidation of debts overperiod of time

Debtor continues in business orpossession of assets. Ifapproved, most debts dischargedafter 3-year period.