One who agrees to be liable for the debt or obligation of another.
The creditor (the obligee)
The principal debtor (the obligor)
and The surety
What is the difference between the Surety vs the Guarantor.
The Surety is directly liable to the creditor on this contract.
The Guarantor is only liable if the debtor does not perform his duty AND the Creditor has exhausted all legal remedies.
True / False: The Surety has the right to force the Creditor to use all means necessary against the Debtor before demanding payment from the Surety.
Those are the rights of the Guarantor, but the Surety must pay regardless of whether the Creditor has pursued the Debtor.
What is necessary to make a Surety contract enforceable.
What 3 remedies does a creditor have available if the debtor defaults on a Surety contract?
Immediately demand payment from the Surety
Immediately demand payment from the Debtor
Immediately go after collateral, if any
True / False: The Surety can force the Creditor to recover from the Debtor before having to fulfill his obligation.
The debtor has the means to pay the creditor, but doesn’t. What is the Surety’s remedy available? What is this remedy called?
The Surety may bring a suit against the debtor to compel him to pay the Creditor
It’s called Exoneration (l. ex-= out of, onus=the load)
The Surety pays the obligation on behalf of the debtor. The Surety now has the right to enforcement of any security interest or priority in bankruptcy that the Debtor had. What is this called?
Subrogation (l. rogare = To ask, sub=in place of)
The Surety pays the Creditor. The Surety then seeks reimbursement from the Debtor for this amount. What is this called?
Reimbursement or Indemnification
How is Indemnification different from Exoneration?
Indemnification: the Surety has already paid the Creditor and is seeking reimbursement from the Debtor
Exoneration: The Surety is forcing the Debtor or the other Sureties to pay the Creditor directly
The debtor fails to pay an obligation wherein there are co-sureties. Only one of the 3 Sureties actually pays the Creditor his portion. What is the Surety’s remedy available? What is this remedy called?
Exoneration (l. ex-= out of, onus=the load)
The one Surety may compel the others to pay their portion directly to the Creditor.
A contract involves co-sureties where one surety fulfills the entire obligation. The other sureties remain obligated, but fail to pay. What remedy is available? What is this remedy called?
The Surety can compel the others to pay their portion back to the Surety
How is Contribution different from Exoneration when co-sureties are involved in a contract?
Exoneration: The first surety compels the other sureties to pay the creditor directly
Contribution: The first surety paid the entire obligation to the creditor and the first surety compels the other sureties to pay him back.
A debtor pays a portion of the obligation but then defaults. The original contract stipulates a set amount that each of 3 co-sureties is obligated. With the reduced amount due, how is the obligation determined for the sureties?
The sureties are obligated to a pro rata share of the remaining debt.
If the default amount (the amount remaining on the loan) and settlement amount (the amount the creditor agrees to end the loan) are different, which do you use when obligating the surety(ies)?
The settlement amount
What are the CPR’S that the Surety can use to avoid the obligation to the Creditor?
Creditor acted in bad faith: Defrauded Principal, Duress on Principal, Illegality of Obligation
Paid: Discharge of Principal’s Obligation
Release: The creditor released the principal
Surety: Is incapacitated or bankrupt
Describe the Surety’s defense using Defrauded Principal.
The surety is not liable if the principal debtor was induced to enter into the contract by the creditor’s fraud.
Describe the Surety’s defense using Duress Upon Principal.
The surety is not liable if the debtor’s promise was obtained under duress and the surety didn’t know.
Describe the Surety’s defense using Illegality of the Principal’s Obligation.
The surety isn’t liable if the obligation is illegal.
Describe the Surety’s defense using Discharge of Principal’s Obligation.
The surety is no longer liable if the debt is paid in full, or the creditor releases the principal debtor.
Describe the Surety’s defense using Surety’s Incapacity or Bankruptcy. How does this affect cosureties.
The surety can’t pay. This changes the pro rata share if multiple sureties.
Describe the Surety’s defense using Lack of Consideration.
Consideration is not necessary to become a Surety; only the promise to pay. Timing of the promise is important.
If the surety promises before the obligation and is aware of the obligation, the promise is valid because the surety was necessary to obtain the credit.
If the surety promises after the obligation, the promise may not be valid because the support of the surety was not necessary to obtain the loan.
Describe the Surety’s defense using Variations of the Surety’s Risk.
Any variation that materially changes the surety’s risk will discharge the surety from the obligation.
Describe the Surety’s defense using Extension of Time vs Delay in Collection.
If the creditor agrees to an extension of time, and a material change occurs, the surety is discharged from the obligation. BUT
If the creditor merely agrees to delay the collection of the debt, the surety remains.
Describe the Surety’s defense using Loss of Security.
The surety is released from any amounts equal to the security released by the creditor, or amounts that should have been released by the creditor using due diligence. (Partial reduction of Surety’s obligation.)
Describe the Surety’s defense using Release of Cosurety.
If the creditor releases one surety, he cannot demand the payment of that share from another surety. (Partial reduction of Surety’s obligation.)
Describe a No Defense Situation for a Surety.
The surety’s obligation is with the creditor even if the following occur.
The debtor lied to the surety to get his support.
The debtor lacks capacity (minor, incapacitated per courts)
The debtor goes bankrupt
Aside from involving a Surety, what are the 3 options available to a Debtor who does not have the ability to pay the Creditor? Briefly describe.
Creditors’ Composition: When all Creditors agree to a less than full payment and discharge the Debtor.
Assignment for the Benefit of Creditors: The Debtor transfers property to a Trustee who disposes of the property and uses the proceeds to pay the Creditors. NOTE that this does not discharge the Debtor.
(1) Before the Debtor has defaulted, but is obviously at risk of defaulting, the Creditor seeks a court order to seize property and place in holding in case of the default.
(2) After the Debtor defaults, the Creditor seeks to seize property that will be sold to satisfy the debt.
(3) After the Debtor defaults, the Creditor may seek a court order that any property owed to the Debtor by 3rd parties be paid directly to the Creditor (such as A/R paid to the Creditor instead of to the Debtor, or monies in a bank acct).
NOTE: Social Security checks cannot be paid directly to a Creditor. It can be garnished once deposited to a bank acct, but not paid directly.
True / False: A creditor seeks garnishment against a debtor’s property. The state’s exemption statutes can overrule the garnishment and prevent the debtor’s personal property from being sold.
The federal lien prevails against the state’s exemption
What is the Mechanic’s or Materialman’s Lien?
When a mechanic or artisan has possession of a piece of property for creation or repair, it is assumed that the temporary possession is, in fact, a lien equal to the amount owed for the service. The lien remains in effect as long as the mechanic holds the property and dissolves once the property is returned.
What type of business is affected by the federal Fair Debt Collection Practices Act?
Collection Agencies; meaning, 3rd parties hired to collect the debt. This is not the same as the original Creditor attempting to collect the debt.
What are the 6 prohibited acts mandated by the Fair Debt Collection Practices Act?
The collection agency cannot:
Threaten or pester a relative or friend of the Debtor to influence the Debtor. The collection agency can call a relative to try to locate the debtor.
Contact the debtor at “inconvenient times” (convenient times are 8am-9pm)
Contact the debtor directly if represented by a lawyer (must call the lawyer instead)
Use harassing or abusive language
Make false or misleading claims
Contact the debtor at the place of employment if the employer objects