Chapter 26. Credit and Suretyship

Chapter Objectives
Distinguish between unsecured and secured credit.
Define mortgages and deeds of trust.
Describe the effects of non complying with recording statutes.
Describe the process of foreclosure.
Define a deficiency judgment and describe the effects of an antideficiency statute.
Explain lender liability.
Describe material person's liens.
Define and distinguish between surety and guaranty arrangements.
Define attachment, execution, and garnishment.
Describe a composition agreement and assignment for the benefit of creditors.

• Unsecured credit is credit that does not require any security (collateral) to protect the payment of the debt.
• Secured credit requires security (collateral) to secure payment of the loan.

Mortgages and deeds of trust

A mortgage is a collateral arrangement where a property owner borrows money from a creditor who used a deed as collateral for repayment of the loan. Parties to a mortgage include:

• Mortgagor—the owner-debtor in a mortgage transaction
• Mortgagee—the creditor in a mortgage transaction

A deed of trust is an instrument that gives the creditor a security interest in the debtor's property that is pledged as collateral. Parties to a trust are:

• Trustee—the holder of legal title of the real property in a deed of trust and note transaction
• Trustor—the owner—debtor in a deed of trust and note transaction
• Beneficiary—the creditor in a deed of trust and note transaction

Recording statutes
A recording statute is a statute that requires the mortgage or deed of trust to be recorded in the county recorder's office of the county in which the real property is located.

Foreclosure
Foreclosure is a legal procedure by which a secured creditor causes the judicial sale of the secured real estate to pay a defaulted loan.

• A deficiency judgment is a judgment of a court that permits a secured lender to recover other property or income from a defaulting debtor if the collateral is insufficient to repay the unpaid loan.
• An antideficiency statute is a statute that prohibits deficiency judgments regarding certain types of mortgages, such as those on residential property.

Lender liability
Lenders have liability exposure in making loans to borrowers. Liability may also be placed on borrowers by statutes enacted by federal or state governments, particularly in the case of environmental laws.

Material person's liens
A material person's lien is a contractor's and laborer's lien that makes the real property to which improvements are being made become security for the payment of the services and materials for those improvements. After the contractor, laborer, or material person has been paid, the property owner should obtain a release of the lien.

• In a surety arrangement, a third party promises to be primarily liable with the borrower for the payment of the borrower's debt.
• In a guaranty arrangement, a third party promises to be secondarily liable for the payment of another's debt.

• Attachment is a collection remedy where the creditors seize the property in the debtor's possession in order to collect on a debt while their lawsuit is pending.
• An execution is a postjudgment seizure and sale of the debtor's property to satisfy a creditor's judgment against the debtor.
• Garnishment is a postjudgment remedy that is directed against the property of a debtor that is in the possession of third persons.

• A composition agreement is an agreement that a debtor and several creditors enter into. If the debtor is overextended and owes several creditors money, the creditors agree to accept payment of a sum less than the debt as full satisfaction of the debtor's debts.
• An assignment for the benefit of creditors is an assignment that allows debtors voluntarily to assign title to their property to a trustee or an assignee for the benefit of creditors.

• antideficiency statute—A statute that prohibits deficiency judgments regarding certain types of mortgages, such as those on residential property.
• creditor—The lender in a credit transaction.
• debtor—The borrower in a credit transaction.
• deed of trust—An instrument that gives the creditor a security interest in the debtor's property that is pledged as collateral.
• deficiency judgment—Judgment of a court that permits a secured lender to recover other property or income from a defaulting debtor if the collateral is insufficient to repay the unpaid loan.
• foreclosure—Legal procedure by which a served creditor causes the judicial sale of the secured real estate to pay a defaulted loan.
• guaranty arrangement—An arrangement where a third party promises to be secondarily liable for the payment of another's debt.
• guaranty contract—The contract between the guarantor and the original creditor.
• land sales contract—Arrangement where the owner of real property agrees to sell the property to a purchaser who agrees to pay the purchase price to the owner-seller over an agreed-upon period of time.
• mortgage—A collateral arrangement where a property owner borrows money from a creditor who uses a deed as collateral for repayment of the loan.
• mortgagee—The creditor in a mortgage transaction.
• mortgagor—The owner-debtor in a mortgage transaction.
• note—(1) An instrument that evidences the borrower's debt to the lender; (2) a debt security with a maturity of five years or less.
• personal property—Property that consists of tangible property such as automobiles, furniture, and jewelry; intangible property such as securities, patents, and copyrights; and instruments, chattel paper, documents of title, and accounts.
• recording statute—A state statute that requires the mortgage or deed of trust to be recorded in the county recorder's office of the county in which the real property is located.
• right of redemption—A right granted to a defaulting debtor or other secured creditor to recover the collateral from a secured creditor before he or she contracts to dispose of it or exercises his or her right to retain the collateral. Requires the redeeming party to pay the full amount of the debt and expenses caused by the debtor's default.
• secured credit—Credit that requires security (collateral) to secure payment of the loan.
• surety arrangement—An arrangement where a third party promises to be primarily liable with the borrower for the payment of the borrower's debt.
• surety—The third person who agrees to be liable in a surety arrangement.
• unsecured credit—Credit that does not require any security (collateral) to protect the payment of the debt.

Internet Links

Government Guide to Credit: www.governmentguide.com/consumer_services/personal_money/credit.adp
How to Get Your Credit Report: www.debtwizards.com/creditreports.html
'Lectric Law Library's Lexicon on Suretyship: www.lectlaw.com/def2/s208.htm
The Surety Association of America: www.surety.org/