PART

PART

Credit

Introduction to Credit and Secured Transactions

Security Interests in Personal Property

Bankruptcy

6

McGraw-Hill/Irwin Business Law, 13/e

© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Introduction to Credit and Secured Transactions

PA ET RHC 28

“Creditors have better memories than debtors.”

Benjamin Franklin, Poor Richard’s Almanac (1758)

Learning Objectives

The meaning of a secured transaction

Suretyship and guarantyLiens on personal propertySecurity interests in real propertyMechanics and materialman’s liens

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In this course, credit refers to transactions in which goods are sold, services are rendered, or money is loaned

Most transactions are unsecured: a service was rendered or goods sold and consumer-debtor promises to pay a bill

To minimize risk, creditors may require a lien (security interest) on debtor’s property

Overview

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If a debtor defaults on an unsecured credit transaction, creditor may send notices to pay and eventually file suit for payment

If a debtor defaults on a secured credit transaction, creditor has several options Rights and liabilities depend on the

security device used: surety, guaranty, lien, or mortgage

If Consumer Fails to Pay

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A surety is jointly liable for payment of another’s debt or performance of a duty Creditor can demand performance from

the surety at the time debt is due A guaranty contract is similar, but

guarantor does not join principal debtor in a promise, but makes a separate promise to be liable only after principle debtor defaults Guarantor is secondarily liable

Surety & Guaranty

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Creditor must disclose any material facts about the risk involved to the surety

A surety may use defenses to a creditor’s demand for payment that principle debtor would have under the primary contract

If surety performs or pays principal’s obligation, the surety acquires all rights creditor had against principal (subrogation)

Surety’s Rights

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A lien is a security interest in or claim on personal property

Some liens (e.g., artisan, innkeeper, common carrier) are created by improvement to goods or provision of services concerning the goods See Aircraft Repair Services v.

Stambaugh’s Air Service, Inc. State law provides procedures to foreclose

a lien (foreclosure)

Security for Personal Property

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Contract devices for real estate as security for an obligation: (1) real estate mortgage, (2) deed of trust, and (3) land contract

Materialmen and mechanics who furnish labor or materials to improve real estate have right to a lien until they are paid

Security for Real Property

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Mortgage: security interest in real property given by an owner (mortgagor) as security for a debt owed to creditor (mortgagee)

Mortgagor can sell the property interest without mortgagee’s consent, but sale does not affect mortgagee’s property interest

If mortgagor defaults, mortgagee may foreclose in accordance with state law

The Mortgage

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A deed of trust is another mechanism for a security interest in real property Generally, treated like a mortgage

A land contract secures the balance due seller for the purchase of real estate An installment contract for a land

purchase

Deed of Trust & Land Contract

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Test Your Knowledge True=A, False = B

A guarantor is primarily liable for debtor’s obligation, and the creditor can demand performance from the guarantor at the time the debt is due.

Since a surety is not the principle debtor, it has no defenses available in response to a creditor’s demand for payment.

A plumber may file a security interest on a house until she is paid for her work.

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Test Your Knowledge

True=A, False = B A creditor must disclose to a surety all

information about the risk involved in a particular debtor, including whether the debtor business is likely to be successful

Foreclosure means that the mortgagor’s rights to the property are terminated.

A mortgage is a security interest in (or deed to) personal property.

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Test Your Knowledge Multiple Choice

Bob Builder contracted with Joe Homes to build a house. Bob hired Ken Carpenter, who built the kitchen cabinets, but Bob refused to pay Ken. What should Ken do? (a) Ken may file a lien on Joe’s real property (b) Ken may file a mortgage on Joe’s property (c) Ken may sue Bob and Joe for redemption (d) Ken may foreclose on Bob for payment

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Test Your Knowledge

Multiple Choice Which two statutory systems permit one

who furnishes labor or materials to improve real estate to claim a lien until they are paid? (a) The Torrens and Priority systems (b) The Pennsylvania and New York

systems (c) The New York and New Jersey

systems (d) None of the above28 - 16

Thought Questions What are the

advantages and disadvantages of credit?

How does credit affect your life?

Do you have any secured credit?

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