Debtor and Creditor In Contract Law
Debtor and creditor in contract law refers to the two parties concerned with the borrowing and lending of funds.3 min read updated on February 01, 2023
Debtor and creditor in contract law refers to the two parties concerned with the borrowing and lending of funds including bank loans, bond sales, notes payable and credit extended. The party that extends credit or lends money to another party is called the creditor while the receiving party is the debtor.
Types of Debtors and Creditors
Debtors and creditors may be legal entities such as private and public corporations, registered and chartered organizations, registered companies of all kinds, governments, and individuals. Any of the above can legally lend and borrow funds. In business, a creditor-debtor relationship is defined by a debt agreement (or contract) which explicitly states the legal obligations, responsibilities and binding rights of both parties.
Business Debt Agreements
These contracts contain the legal remedies that are available to all parties in the event that either one fails to fulfill their obligations or expectations. The contract can contain provisions which compel the debtor to furnish the creditor with goods, money or services.
Although a creditor-debtor relationship can arise due to the debtor's failure to pay stipulated fine(s) to the community or compensation or damages to an injured party, such a relationship generally implies that one party (the debtor) has received something from the other party (the creditor) which must be repaid at a later date by the debtor.
Once the deadline elapses and the debtor hasn't repaid the debt in full, other routine means of debt collection can be utilized. If all else fails, an attorney may be called upon to commence a formal process of debt collection. In some cases, the bank account, wages, and properties of the debtor may be accessed as a way to force payments.
It is possible to secure liens against the property of the debtor, which will permit law enforcement officers or local officials to seize such properties, sell them at a public auction and use the resulting proceeds to discharge the owner's debt. Although it was routine in the past, imprisoning debtors is no longer the norm. Exemption laws may impede the debt collection process; these laws provide that some of the debtor's property (such as landed property, life insurance, and sums of money) may not be sold or seized in order to discharge the debt.
Laws Governing Debtor-Creditor Relationship
Creditor-debtor law governs all situations where debtors are unable to pay the monetary debt (or other forms of debt) owed. There are three kinds of creditors
- Those who have liens on a piece of property — The property (or its proceeds when sold) will be used to pay off debts to the lien creditor before any remnant can be used to pay off other creditor's debts. Liens may arise through judicial proceedings, an agreement between parties, or statutes.
- Creditors who have priority interests which arise through statutory law. If a debtor becomes insolvent, creditors whose debts were granted priority must be paid off first before satisfying other debts. For instance, Congress granted priority to all debts owed to the Federal Government.
- Creditors who are neither subjects of statutory priority or have liens against the property of the debtor.
Policies Guiding Debt Collection Methods
Primarily, non-bankruptcy creditor-debtor law arises from common and state statutory law. State courts use defamation as well as statutes to limit private methods of collecting debt. Also, the Fair Debt Collection Practices Act was enacted by Congress to regulate the activities and debt collection methods of creditors.
Some of the judicial and statutory measures creditors use to collect debts include:
- Attachments are limited statutory remedies whereby creditors seize the properties of debtors to satisfy debts. Garnishment allows creditors to collect part of the debt (for instance, wages) to satisfy pending obligations.
- Replevin allows creditors to seize items, such as security interests (in which they have an interest in) to satisfy debts.
- The practice whereby a law court appoints a third party to handle the disposal of a debtor's property to satisfy debts is called the receivership.
Creditors usually create liens on the properties of debtors using the judicial process called lien creation. Once created, state statutory law governs the execution of a lien against the properties of debtors as well as the sales of properties under such liens. The Federal Consumer Credit Protection Act as well as state and federal statute limit the kinds of properties that can be used for debt satisfaction.
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