Chapter 29

Other Creditor’s Remedies and Suretyship

Laws Assisting Creditors

*LIENS*

• Lien: An encumbrance on real property or personal property to secure a debt or to protect a claim for payment of a debt. It is a claim or charge on the debtor’s property that must be satisfied before the property is available to satisfy the claims of other creditors.

• Mechanic’s Lien: A lien on real property or personal property to ensure payment for work performed and materials furnished in the repair or improvement of real or personal property. Has priority over perfected security interests unless a statute provides otherwise.

• Artisan’s Lien: A lien on personal property to ensure payment for services performed to repair, improve, and/or enhance the value of the personal property. Has priority over perfected security interests unless a statute provides otherwise. It is possessory in nature. The leinholder has to maintain possession of the property.

• Innkeeper’s Lien: A possessory lien on the luggage, and contents thereof, of a hotel’ s guest for unpaid hotel charges.

• Judgment Lien: A lien obtained by judicial order in favor of a creditor.

• Writ of Attachment: A court order to seize and take into custody property of the debtor prior to the issuance of a judgment lien.

• Writ of Execution: A court order, following the issuance of a judgment lien, to seize and sell property of the debtor.

GARNISHMENT, COMPOSITION, AND

FORECLOSURE

• Garnishment: Legal process used by a creditor to collect a debt by seizing property of the debtor (e.g., wages) being held by a third party (e.g., the debtor’s employer).

• Both state and federal laws restrict the amount of money that can be garnished from a debtor’s paycheck. It is very limited in Texas except for certain things, such as child support and taxes.

• Composition Agreement: A negotiated agreement between a debtor and his or her creditors by which the creditors agree to accept a lesser sum than that owed in full satisfaction of the debt. Usually done in bankruptcy.

• Foreclosure: A mortgage holder (the mortgagee) has the right, subject to state law, to foreclose on mortgaged property in the event that the debtor (the mortgagor) defaults.

• Foreclosure is typically accomplished by seizing the property and selling it by judicial sale.

• If the proceeds of the sale are not sufficient to satisfy the mortgage, the mortgagee may seek a deficiency judgment to collect the balance due from the debtor.

• Assignment for Benefit of Creditors: A debtor may assign his or her assets to a trustee for the benefit of the debtors creditors. This is a voluntary action, usually in bankruptcy.

SURETYSHIP AND GUARANTY

• Suretyship: An express promise by a third party (the surety) to a creditor to be primarily responsible for the debtor’s obligation to the creditor. Simply put, the third party is completely and primarily responsible for the debt of the principal.

• Guaranty: An express promise by a third party (the guarantor) to a creditor to be secondarily responsible for the debtor’s obligation to the creditor -- that is, to pay the debt if, but only if, the debtor defaults. A guaranty may be:

• Continuing (designed to cover a series of transactions) or specific (designed to cover a particular transaction);

• Unlimited or limited as to time and amount; and

• Absolute (guarantor’s liability arises automatically) or conditional (guarantor’s liability arises only on the occurrence of some event, such as default).

• Defenses of Sureties and Guarantors: Sureties and guarantors are entitled to assert the same defenses against payment as the debtor (e.g., fraudulent inducement, material modification, satisfaction, rejected tender of payment), except for (i) bankruptcy of the debtor and (ii) limitations.

RIGHTS OF SURETIES AND GUARANTORS

• Subrogation: The right of a guarantor or surety to stand in the shoes of or be substituted for another party, typically the creditor, and assume all of that party’s rights with respect to a particular transaction or series of transactions. In other words, any right that the creditor had against the debtor now becomes the right of the surety.

• Reimbursement: The right of a guarantor or surety to be restored, repaid, or indemnified for costs, expenses, or losses expended or incurred on behalf of the debtor.

• Contribution: The right of a co-surety or co-guarantor (where two or more persons are acting as surety or guarantor) to recover from his or her co-surety(-ies) or co-guarantor(s) any costs, expenses, or losses expended or incurred on behalf of the debtor greater than his or her proportionate share.

PROTECTION FOR DEBTORS

Certain property of the debtor is Exempt from seizure by a creditor.

For example, there is the homestead exemption.

Usually household furnishing are exempt, clothing, many personal possessions, and a vehicle (if clear), certain livestock and pets, and equipment used by a person to make a living.