Ultimately within our financial system there are creditors and debtor. A creditor is somebody who loans something to another. A debtor is somebody who owes something to another.
Imagine a party that opens a business. All businesses need to be financed somehow. If the party goes to another for financial support, there are two ways they can obtain that support: debt, or equity. Debt is simply a loan, typically with a return interest rate. This debt must be paid back and ultimately has much less risk than equity. Equity is typically provided upfront with the promise of percentage of ownership within the business. Although this may be much more profitable, it has much more risk because a creditor will always collect before an equity owner. A secured creditor has even more protections.
Article 9 of the Uniform Commercial Code (UCC) outlines the structure of secured transactions between parties. An important thing to remember is that Article 9 helps prepare parties for when things go wrong. So what happens if a transaction occurs without Article 9?
Debts are generally created through a contract. For example, one party agrees to give one party 100 dollars in return for getting 105 dollars six months from now.
Collecting Debts Non-judicially
If a party chooses not to pay back their debt, the creditor is not allowed to engage in torts or criminal actions to recover their property.
Methods of Collection
- Ask for what is owed.
- Setoff. If Party A owes Party B $1,000 and Party B owes Party A $1,500, then the parties can offset the difference. In this case, Party B would still owe $500 to Party A.
- Debt collection. There are statutes regulating debt collection agencies so they act fairly.
Debts can be collected through by obtaining a judicial lien. The process goes as follows:
- Default on the debt.
- A lawsuit is initiated against the debtor.
- A judgment is made against the debtor.
- There is a Writ of Execution which gives the Sheriff the authority to collect the debtors assets.
- The Sheriff levies the writ (seizes) part of the judgment. This is the point where the secured creditor have a lien (in rem rights) to the personal property. Interestingly, the debtor still has in rem rights in the property at this point.
- Then the seized property is auctioned off.
- Finally, the profits are distributed to the judgment creditor. If there is any judgment leftover, then the process restarts to discover more assets.
The problem with this process is that this is long and expensive. This also gives the debtor time to hide their assets, or even become judgment proof.
Even if the creditor is owed money from the debtor, they may not be able to recover certain assets. These assets are protected. Although each jurisdiction is unique, there are certain assets that are generally exempted from recovery:
- Personal photos
- Household furniture
Typically, these exemptions apply primarily to individuals, not businesses.
Sometimes statutes will put a lien on property. A good example of this is a mechanics lien. What happens with this is that there is an automatic lien that occurs when an automobile owner goes to mechanic. Essentially, the mechanic has the right to retain your vehicle until you pay for the services rendered. In other words, if you want your car back, you need to pay for the service. This ensures that mechanics actually fix the car and that they get paid for it.
Most of our time in secured transactions will discuss consensual liens.
Advantages for Creditors
May include the right to take possession of property directly from the owner. For example, the creditor can use the “replevin” remedy to repossess personal property from the debtor if the creditor does not already have possession.
Additionally, creditors receive liens, the right to foreclose on the property. This also leads into priority. Ultimately, the creditors want first priority, because this allows them to recover first.
Not only do they have liens, they have a security interest. That means that the creditor still has a property interest. Without this property interest, then the creditor may have committed a tort in recovering property. With the property interest, they are much more likely to recover without committing a tort or crime.
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.