What is Debtor-Creditor Law?
Planning for what could happen when the debtor-creditor relationship unravels
on June 27, 2022
A debtor is a person who owes someone else money due to a payment obligation. A creditor is a person who is owed money due to the payment obligation.
Payment obligations can take many forms:
- 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
As long as the debtor pays the creditor, the debtor-creditor relationship generally goes smoothly. However, the relationship can quickly unravel if a debtor fails to pay the creditor or defaults.
Debtor-creditor law governs what happens when the debtor-creditor relationship unravels due to nonpayment and creditors seek legal remedies to get their money back. For example:
- 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?
In addition to methods of debt satisfaction, debtor-creditor law also touches on issues involving:
- 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 Law
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
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, as discussed below.
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 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.
In 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.
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
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 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 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 about the illegal action to avoid? It’s called fraudulent conveyance. The Uniform Fraudulent Transfer Act (UFTA) is a model code enacted in 45 states and the District of Columbia. The UFTA makes transferring assets to a third party to prevent a creditor from seizing the assets a fraudulent act.
So, you cannot 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
- Identity theft victims
- Collection agencies
Attorneys focused on individual debtor-creditor issues might represent clients on either side of creditor lawsuits. Attorneys 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.
Questions for an Attorney
Fortunately, 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 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 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.