What is Debtor-Creditor Law?
Planning for what could happen when the debtor-creditor relationship unravelsBy Canaan Suitt, J.D. | Last updated on February 2, 2023
Use these links to jump to different sections:
- How Does Debtor-Creditor Law Fit In With Bankruptcy?
- The Process for Satisfying Debt
- Where To Bring a Claim
- Ways of Preventing Creditor Collection
- What Does a Debtor-Creditor Attorney Do?
- A loan, including a mortgage, auto loan, or student loans
- Credit card debt or other forms of consumer debt
- Tax liens, when someone fails to pay their taxes
- A lease for the use of property, such as an apartment, house, or other asset
- Money damages awarded in a civil lawsuit
- When can a creditor take a debtor’s property?
- What is the legal process for doing this?
- What rights does a debtor have in the process?
- Debt collection practices and consumers’ rights
- Procedures for businesses to extend credit
- Debt collection if there has been identity theft
How Does Debtor-Creditor Law Fit In With Bankruptcy?Bankruptcy is a part of debtor-creditor law established by federal law. In fact, Article 1, section 8, clause 4 of the U.S. Constitution gives Congress power to set up “uniform Laws on the subject of Bankruptcies throughout the United States.” Congress most recently did this in the federal Bankruptcy Code of 1978 (with later updates, including 2020).
Sources of Non-Bankruptcy LawBankruptcy is often the last resort for resolving issues when a debtor fails to pay their debts to a creditor. Before bankruptcy, there are other options for settling debtor-creditor problems. Non-bankruptcy options are governed mainly by state law, including state statutes and common law (judicial cases). There are also a couple of relevant federal statutes, included under the Consumer Credit Protection Act (CCPA):
- Title III: The Federal Wage Garnishment Law regulates how creditors can garnish wages – that is, have a debtor’s employer withhold part of the debtor’s wages to pay their debts
- Title VIII: The Fair Debt Collection Practices Act requires debt collectors to treat debtors fairly in the collection process and prohibits abusive debt collection practices
The Process for Satisfying DebtWhat remedies does a creditor have if a debtor fails to pay their debt? The first thing to note is that creditors can’t take matters into their own hands by automatically seizing a debtor’s piece of property and selling it off. A creditor must first obtain what’s called a lien: a legal interest in the debtor’s property for payment of the debt. There are different types of liens, as discussed below.
Judicial LiensJudicial liens are liens that a creditor obtains through the judicial process – that is, by bringing a lawsuit against the debtor. There are a few kinds of judicial liens:
- Judgment Liens. When a creditor wins a lawsuit against a debtor, they obtain a judgment against the debtor. Essentially, this judgment gives legal backing to the creditor’s claim to the debtor’s property. In most states, when a creditor gets a judgment, they must record it with their state or local county.
- Writ of Execution. Suppose a creditor got a judgment lien against a debtor. Still, the debtor fails to sell off their property to repay the debt promptly. In this case, a creditor can obtain a writ of execution from the court authorizing a sheriff or local law enforcement to seize the debtor’s property.
- Wage Garnishment. If a creditor obtains a judgment against a debtor, one option is to garnish the debtor’s wages. Also known as wage attachment, wage garnishment is when an employer withholds a portion of the debtor’s wages and gives it to the creditor directly. The exact rules governing wage garnishment vary by state.
Statutory LiensIn addition to liens obtained through court orders, some liens are created by statute. Examples of statutory liens are:
- Tax liens. If a person fails to pay taxes, the government can obtain a lien to seize assets for taxes owed.
- Landlord liens. If a tenant fails to pay rent or other money owed to a landlord, the landlord can obtain a lien against the tenant’s property for payment.
Consensual LiensWhile judicial and statutory liens are created without the debtor’s consent, consensual liens are created by agreement between the creditor and debtor. A common type of consensual lien is a mortgage. In a mortgage, a creditor (such as a bank) lends money to someone to buy a house, and the house secures the loan. With this security interest in the house, the creditor has a right to pursue the house if the debtor defaults on the mortgage. State laws govern the formation and legal consequences of consensual liens. One important feature of consensual liens is that they typically give the person lending (the creditor) a right in the debtor’s property over the claims of other potential creditors. In other words, the lender gets priority if there is a dispute between multiple creditors over the debtor’s property when the debtor becomes insolvent.
Where To Bring a ClaimSome debtor-creditor disputes between individuals can be settled in a small claims court. Generally, small claims courts can award anywhere from $2,000 to $25,000. In more complex cases, seeking legal representation from an experienced debtor and creditor rights attorney is advisable. For example, if a creditor is seeking a judgment lien in state court, it is essential to have an attorney to navigate the lawsuit. Individuals who decide to file for bankruptcy can do so through their local bankruptcy court. Bankruptcy courts are specialized federal courts that exclusively handle bankruptcy issues. The process of filing for bankruptcy can be involved and complex. Getting legal advice from an experienced bankruptcy lawyer is often essential to ensure the best outcome.
Ways of Preventing Creditor CollectionAre there ways for a debtor to prevent a creditor from taking their property? Yes, there are a couple of legal options you could pursue and an illegal action to beware.
- Negotiate. One option is negotiating with your creditor about a plan to pay off the debt. The creditor would probably prefer to avoid the costs involved in a lawsuit or the possibility of the debtor filing for bankruptcy. Even if the success of negotiation seems unlikely, it is worth trying. It could lead to a definite plan.
- Claim Property as Exempt. Another option is to claim eligible property as exempt from the creditor’s collection. Exemptions depend on your state laws but could include your clothing or personal effects, furniture, cars, or house. It’s important to note that if you are still making mortgage payments on your house, your creditor has a lien securing the house against what you owe. In this case, your house could be foreclosed or repossessed if you fall behind on payments or default.
What Does a Debtor-Creditor Attorney Do?Depending on their specific area of practice, a debtor-creditor attorney might handle any of the issues discussed in this article. Typical clients include:
- Individual debtors
- Consumer creditors
- Identity theft victims
- Collection agencies
Questions for an AttorneyFortunately, many attorneys provide free initial consultations to prospective clients. These consultations allow the attorney to hear the facts of your case and for you to determine if the attorney or law firm meets your needs. To see whether an attorney is a good fit, ask informed questions such as:
- What are your attorneys’ fees, and how do you bill your clients?
- What are my options for handling my debt?
- Should I think about filing for bankruptcy?
- What is the statute of limitations in my situation?
- What property would be at risk or exempt?
Finding the Right Attorney for Your NeedsIt is essential to approach the right type of attorney—someone who can give you legal help through your entire case. You can visit the Super Lawyers directory and use the search box to find a lawyer based on your legal issue or location. If you need legal assistance with debtor-creditor issues, consider looking for a debtor and creditor rights attorney.
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