What Is Debtor-Creditor Law?

Debtor-creditor law is the legal framework regulating the relationship, legal rights, and responsibilities of lenders and borrowers. A loan agreement or promissory note details the loan terms. Enforcement tools for unpaid balances include wage garnishment, judgment liens, or asset seizure. Options for borrowers facing financial default and a lower credit score include settlement negotiation, repayment plans, or debt discharge through bankruptcy filing. State and federal consumer protection laws ensure fair debt practices by debt collection agencies.

For legal guidance on these matters, reach out to an experienced creditor-debtor rights lawyer in your area.

How Does Debtor-Creditor Law Fit In With Bankruptcy?

Bankruptcy is a part of debtor-creditor law established by federal law. In fact, 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 subsequent updates).

Bankruptcy 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

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The Process for Satisfying Debt

What 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:

Judicial Liens

Judicial 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 that gives them legal backing to claim 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. If a debtor fails to sell off their property to satisfy a creditor’s judgment lien, the creditor can obtain a writ of execution authorizing a sheriff or local law enforcement to seize the debtor’s property.
• Wage garnishment. Also known as wage attachment, 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 Liens

Some liens are created by statute rather than court order. 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 Liens

While 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 Claim

Some debtor-creditor disputes 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.

People 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 complex, so getting legal advice is recommended.

Ways of Preventing Creditor Collection

Are 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 a creditor about a plan to pay off the debt. Creditor would probably prefer to avoid the costs of a lawsuit or the possibility of a 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 about the illegal action to avoid? It’s called fraudulent conveyance. The Uniform Fraudulent Transfer Act (UFTA) is a model code that prohibits the transfer of assets to a third party in order to prevent a creditor from seizing the assets.

So, you can’t transfer ownership of your assets to someone else to hide them from your creditor. Doing so would constitute fraud and put you in a worse situation than you were in initially.

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
• Businesses
• Identity theft victims
• Collection agencies

Attorneys focused on individual debtor-creditor issues might represent clients on either side of creditor lawsuits. They can help clients deal with various legal problems, including getting a judgment lien, wage garnishment, property repossession or foreclosure, asset investigation, tax issues, or rental disagreements.

Attorneys representing businesses might advise on credit lending practices, the proper way to collect debts, or state contract law governing agreements between creditors and debtors.

Finding the Right Attorney for Your Needs

It 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 to look for an experienced debtor and creditor rights lawyer near you.