Banking & Finance Law
Some creditors have special rights to collect debts in the form of liens. Liens may come up in various ways including judgment liens obtained as a result of court proceedings. Creditors commonly seek to create a lien on a debtor's property through a judicial process of lien creation, which is governed by state law.
Once a lien has been created state law governs how the lien is executed against the debtor's property. A debtor may provide a creditor with a lien on personal property in order to obtain a loan form the creditor, such as a car loan.
When taxes are not paid, the government will have a lien. A mechanic who works on real property will have a mechanics lien whereby the mechanic may retain the property until payment is made for the work. The lien may give the creditor priority over other creditors attempting to collect from the same debtor. A lien on property may give the creditor the right to foreclose by selling the debtor's property to pay off the debt.
There are creditors who have a lien against a piece of property. The property or proceeds from its sale must be used to satisfy the debt to the creditor holding the lien before it can be used to satisfy debts to other creditors.
A lien may arise from agreement between then parties or as a result of court proceedings. There are creditors who have a priority interest established by statute. For example, debts owed to the Federal Government have a priority interest and must be paid before other debts.
Finally, there are creditors who do not have a lien against the debtor's property, nor do they have a priority interest.
Redemption is a legal term that describes a debtor’s action of reclaiming collateral that a creditor took legal possession of pursuant to the terms of a secured loan. Typically, a debtor must pay the creditor the fair market value of the collateral in order to redeem it. Some states have specific laws about when and how a debtor may redeem property. Sometimes a debtor must seek a court order to complete redemption.
A creditor can only collect interest on a debt if there is an agreement beforehand, whether it is a credit application, a sales or purchase contract. If a creditor receives a court judgment, most courts do allow post judgment interest in rates that vary from state to state. Court costs are also recoverable and added to the amount of the final judgment.
For a business debt, how do you determine what parties are actually responsible for the debt? When the debtor is a business entity, it is critical that you identify the parties legally liable for the debt. Knowing all potential parties beyond the primary borrower is extremely important in collecting a debt when the primary obligor has no reachable nonexempt assets after obtaining a judgment.
Identification of the responsible party or parties is first determined by the type of business entity of the debtor organization. Identifying the debtor as a proprietorship, partnership, limited partnership, limited liability partnership, corporation or limited liability company is the first step in finding out all the responsible parties on a debt.
The creditor needs to consider the costs involved with pursuing a judgment. Even when attorney fees are contingent upon recovery, additional expenses include court costs and in some cases third party services for investigators, consultants and experts.
Further, the creditor should consider the potential expense of defending a counterclaim. Another issue to be considered in deciding whether or not to pursue a judgment is the likelihood of a recovery from the debtor once you obtain your judgment. Whether or not the debtor is solvent is obviously an important factor in determining the likelihood of a successful collection after judgment.
However, sometimes it is very difficult to assess the debtor's true financial picture when the collection problem first materializes. Finally, a creditor must always consider the risk of losing regardless of the how valid his claim may be.
When an individual files bankruptcy, the automatic stay protects the debtor from all forms of collections so the first thing to do is cease any collection efforts. When you receive the notice of bankruptcy, you should file a proof of claim form promptly. The notice will indicate the deadline to do so. This form must be filed to preserve your right to share in the distribution from the bankruptcy estate.
There are several remedies possible once a creditor has filed a lawsuit and prior to receiving a final judgment.
Attachment is a court order permitting the creditor to seize the debtor's property. A creditor may utilize this remedy when it is likely that the debtor's assets will not be around when a judgment is obtained.
Attachment is restricted to limited circumstances such as when a debtor is about to dispose of the property, when the claim is based on fraud or where a debtor cannot be served with the complaint. The laws that apply to attachment vary from state to state. A hearing is typically required and order of attachment directed to the sheriff.
Replevin allows a creditor to recover possession of personal property when the creditor has title to the property or a right of possession. This remedy could apply where property is leased to a consumer who fails to make the monthly payments. Replevin will only be ordered by the court under special circumstances such as when damage or loss of the property is likely.
Receivership involves the appointing of a third party by a court to dispose of the debtor's property in order to satisfy the debt. If the remedies described above are not successful, a court judgment must be obtained. This may be obtained after a jury trial or by default if the debtor does not contest the case. If a judgment is ordered, the judgment must then be enforced.
A secured transaction is when a creditor is given a right to a lien on the debtor's property to guarantee payment of the debt. A security interest arises when in exchange for a loan a borrower agrees, in a security agreement, that the lender (the secured party) may take specified collateral owned by the borrower if he or she should default on the loan.
A secured creditor has priority over an unsecured creditor in debt collection efforts against the property securing the debt. A security interest also provides the secured party with the assurance. If the debtor should go bankrupt they may be able to recover the value of the loan. They have to take possession of the specified collateral. That is instead of receiving only a portion of the borrowers property after it is divided among all creditors.
A secured creditor can increase its rights against other creditors by perfecting its interest. This is accomplished by the public filing of a document identifying the creditor, debtor and secured property.