Slide 1DebtSec.1: Laws Assisting CreditorsLiens and Secured DebtLiens and Secured DebtLiens and Secured DebtLiens and Secured DebtInvoluntary LiensJudicial LiensGarnishmentsComposition AgreementsSec. 2: MortgagesTypes of MortgagesHome Equity LoansCreditor ProtectionMortgage ForeclosureWays to Avoid ForeclosureForeclosure ProcedureForeclosure ProcedureForeclosure Procedure1Debtor-Creditor Relations and Bankruptcy—Part 1Chapter 16—Sections 1 and 22Debt“Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.” (Hamlet, Act 1, Scene 3)Why is debt a good thing for borrowers? When it is a bad thing?Why is debt a good thing for lenders? What are the potential problems faced by lenders?3Sec.1: Laws Assisting CreditorsDebt is classified as “secured” or “unsecured;” therefore, creditors are either “secured creditors” or “unsecured creditors.” The nature of debt determines a creditor’s collection options in the event a debtor fails to pay the debt when it is due (“defaults”).Unsecured debt is not tied to any item of property that serves as security for the debt (there is no collateral). Examples: credit card debt, medical bills, utilitiesIf normal collection efforts fail, an unsecured creditor can sue the debtor to obtain a court judgment for the amount due. If debtor does not pay the judgment, the creditor may take additional legal actions to try to collect payment.4Liens and Secured DebtSecured debt is debt for which the creditor has a lien on certain items of property owned by the debtor. A lien is a secured creditor’s claim against a debtor’s property (“collateral”) to secure payment of a debt. If the debt is not paid, the collateral can usually be repossessed and sold by the creditor to satisfy some or all of the related debt.Secured debt must be paid off before the underlying collateral can be sold/transferred by the debtor to a third party (inventory is an exception).Liens and Secured DebtMost liens are voluntary, such as when a debtor contractually grants a creditor a lien on property to induce the creditor to make a loan. Liens may arise in connection with the purchase of personal property (“security interest”) or real estate (“mortgage”). Liens can also arise when a lender demands collateral as a condition for any type of loan (such as a line of credit for a business). In addition to collateral, a lender may also require a third party guaranty of the loan. (covered in Sec. 3, which will be skipped for this class)5Liens and Secured DebtA creditor with a lien on personal property (generally meaning anything other than real property) is said to have a “security interest” in such property. A “purchase money security interest” arises when a creditor provides funds for the purchase price of personal property that is collateral for the loan (e.g., equipment, inventory, furniture, etc.)Extensive rules regarding the creation and perfection of security interests in personal property are established by UCC Article 9, but will not be covered in this course.Mortgages, which create liens on real property, will be covered in Section 2.67Liens and Secured DebtIf the debtor defaults on secured debt, the secured creditor can usually repossess and sell the collateral. Repossessions do not require a court order, but must be “peaceful” and in compliance with applicable state statutes.Real property serving as collateral can be foreclosed on.The proceeds of the sale of collateral are applied to the related debt. If the proceeds are insufficient to satisfy the debt, the debtor generally remains liable for the “deficiency.”The deficiency becomes an unsecured debt because there is no longer any collateral (it was sold). To collect the deficiency, the creditor must sue to get a judgment for the amount due.8Involuntary LiensA “mechanics lien” can be recorded on real property by a party who provides materials or services and is unpaid (subject to strict notice and filing/recording procedures). This is a nonpossessory lien.An “artisan’s lien” is a possessory lien arising from the failure of a debtor to pay for labor or materials furnished in connection with repair of personal property (e.g., auto or jewelry repair). The lienholder can retain possession of the property until paid (or may be permitted to sell the property under state statutes).9Judicial LiensA “judicial lien” typically arises when a debtor fails to pay a judgment (a court order to pay an amount to the plaintiff), and the unpaid creditor (“judgment creditor”) obtains a lien on certain items of the judgment debtor’s nonexempt property. The judgment creditor may petition the court for:Writ of Attachment: a pre-judgment order permitting debtor’s “nonexempt” property to be taken into custody by the sheriff before a judgment is issued in a lawsuit (not common).Writ of Execution: a post-judgment order directing the sheriff to seize debtor’s nonexempt real or personal property located in the county and sell it to satisfy the judgment entered in a lawsuit.10GarnishmentsA garnishment is a court order directing a third party (“garnishee”) who is in possession of nonexempt property owned by a debtor to turn over such property (e.g., bank accounts; personal property held by others) to the creditor for the payment of debts.A wage garnishment is a court order directing an employer to withhold a portion of debtor’s wages for payment of debts to a creditor (e.g., delinquent child support payments owed to custodial parent). Subject to federal and state statutory limits (typically 25% of take-home pay).Composition AgreementsCreditors may enter into binding contractual agreements (“creditors’ composition agreements”) with debtors, whereby the outstanding debt will be satisfied by a lesser amount than actually owed. 11Sec. 2: MortgagesWhen a party borrows money to purchase real property (land and buildings), a mortgage loan document is executed whereby the purchaser grants a lien on the real property to the lender as security for the loan (making it “secured debt”) The real property is considered “collateral” for the loan.Mortgages are used in connection with both home loans and commercial property loans.Interest paid by individuals for mortgages on their primary