Part 6- Credit, Chapter 28: Introduction to Credit and Secured Transactions, Doc 1

Key Concepts from the Chapter: Credit, Security Interests, and Suretyship 1. Types of Credit: Credit can be extended on an unsecured or secured basis. o Unsecured Credit: Relies solely on the debtor's promise to pay, leaving the creditor at greater risk if the debtor defaults. Remedies for creditors are often limited to obtaining a judgment and executing it through wage garnishment or seizing property if the debtor has assets. o Secured Credit: Involves collateral (such as property or a cosigner) that the creditor can pursue directly if the debtor defaults. For instance, a car loan may be secured by the vehicle itself, allowing the lender to repossess it upon non-payment. 2. Security Interests in Real and Personal Property: o Personal Property: Governed by the Uniform Commercial Code (UCC) Article 9, which streamlines and regulates the process for creating security interests in items like inventory or equipment. o Real Property: Involves tools like mortgages, trust deeds, and land contracts that enable creditors to claim interests in the debtor's real estate. Mechanic’s liens can also apply if contractors or suppliers are unpaid, securing their claim against the property itself. 3. Suretyship and Guaranty: o Surety: A third party who becomes primarily liable alongside the debtor, meaning the creditor can demand payment from the surety without first pursuing the debtor. For example, a parent co-signing a loan becomes a surety. o Guarantor: A third party who is secondarily liable, only responsible if the primary debtor defaults. A guarantor’s liability usually requires a written agreement due to the statute of frauds. o Distinction: Sureties have direct liability, while guarantors only face liability upon debtor default. Most commercial contracts assume a joint liability structure, making the surety arrangement more common. 4. Rights and Duties of Sureties and Guarantors: o Sureties and guarantors have similar obligations to creditors, yet courts are generally more lenient with accommodation sureties (those who co-sign out of goodwill without compensation) compared to compensated sureties (often professional entities). o Changes to Original Contract: If the creditor and debtor alter the terms of the original agreement, the surety must consent to these changes. Otherwise, the surety may be discharged from liability. o Extension of Time: Simple extensions provided without a formal agreement generally don’t discharge the surety. However, a binding extension agreement between creditor and debtor that modifies repayment terms without the surety's consent can release the surety from liability. 5. Defenses of Surety and Creditor’s Duties: o o Sureties may assert defenses based on defects in the primary contract (e.g., fraud, lack of consideration) but cannot use personal defenses of the debtor, such as the debtor's bankruptcy or incapacity. Creditor Duties: Creditors must act in good faith and adhere to the terms agreed upon with the debtor and surety. If they act in bad faith, it can relieve the surety from liability. Additional Chapter Questions:     Assumption of Mortgage: When Richards assumes a mortgage, he agrees to be responsible for the existing debt, which binds him to the terms previously established between the original borrower and the lender. Contractor Surety and Extensions: If Richards extends the construction timeline without consulting the surety, he may risk the surety withdrawing or modifying its terms of assurance. Subcontractor Liens: Subcontractors and suppliers unpaid by the contractor may file liens against Richards’s property to secure payment for their contributions to the construction. Possessory Lien by Repairman: The repairman may hold a possessory lien on the equipment he repaired until Richards pays. This right typically remains even if the work was completed off-site. These principles guide creditors and debtors in structuring secured transactions and understanding the protections and risks inherent in secured and unsecured credit arrangements.