The Debtor-Creditor Relationship

This is Dave. My intention, for the near future, is to continue posting on this blog. Property offers numerous avenues of education and application. I happen to have a strong interest and affinity in matters concerning real property. People reading these articles aspire in a wide variety of professions. As a result, it is hard for me to target a particular audience, such as the title examiner, the attorney, or the land owner. I am not looking for monetary profit from this blog site; quite the contrary. In my own way, I consider myself a fiduciary of my profession. I feel that I have a professional responsibility to uphold the traditional aspects of property law. Over the past decade, I have read tens of thousands of pages regarding all matters property. I write these articles on the fly, without the aid of notes or outlines. For me, it is both easy and enjoyable. I happen to be someone that believes in passing knowledge along, not sequestering it. So hold tight, continue to read, and allow yourself to learn.

This article will concern the basic relations between a debtor and its creditor.

A debtor is an individual or entity that is under an obligation to pay back money it has borrowed from its creditor.

A creditor is an individual or entity owed money from its debtor.

To demonstrate this relationship, let's use a common story. My readers are familiar with credit cards and the financial disasters they may create for the uneducated. In my opinion, the national law should be: If you can't pay for the item in cash, then you can't have it! Our country has become the giant 'pie in the sky'. I digress. Anyhow, an individual applies for a credit card and his application is approved. Let's say the credit company sets the credit limit at $3,000.00. The debtor-creditor relationship is established the moment the individual uses his card. The individual is the debtor and the credit company is the creditor. The iceberg is dead ahead!

Moving ahead in this relation, let's say the debtor has maxed out his card. Additionally, the debtor is in arrears on his scheduled payment. Now the compound interest monster begins to raise its ugly head. Before our debtor can find a suitable life raft, his obligation to the creditor has ballooned to $5,500.00. Now he's really in the soup! He knows it, and his creditor knows it. Now the games begin.

The creditor's perspective:

The creditor starts with soft zone coverage. They mail numerous notices and place numerous calls to the debtor. This usually brings false promises of repayment. The debtor knows it, and his creditor knows it. So, the creditor moves to the full court press. The creditor brings in the ever friendly credit collection agency. It's like putting John Rambo on the debtor's ass. Unfortunately, Colonel Troutman is not available to assist the debtor.

The phone calls ramp up; the threatening letters ramp up; and now we have a race to the finish line. The creditor will now look to its remedies under state law. In Michigan, the creditor may sue its debtor for the purpose of obtaining judgment. The creditor may then attempt to attach and sell personal assets of the debtor in satisfaction of its judgment. Additionally, pursuant to the recently adopted Judgment Lien Act of 2004, the creditor may simply record its judgment in a county where the debtor owns land. Upon proper recording, the creditor's judgment will attach to the debtor's interest in real property. Curiously, this recent legislation does not allow the creditor to foreclose its lien. The creditor can only collect after sale or refinancing of the property, and only if there is an equity cushion in the property. The Judgment Lien Act will be the topic of a later article.

Now, the reality is that most debtors, who are in financial distress, will not have enough money to satisfy the judgment; nor will the debtor own enough nonexempt personal assets to satisfy the judgment. But the most basic reality is that the creditor will spend too much time and money of its own in attempting to collect the debt. It's one thing if the creditor's judgment is against a multi-million dollar corporation; quite another if its judgment is against a typical homeowner.

Another remedy for the creditor is to invoke the powers of federal bankruptcy law. If the debtor has enough creditors, and the aggregate amount owed is great enough, the numerous creditors may join in the filing of an involuntary petition under Chapter 7. This involuntary filing cannot be brought under Chapter 13. This makes sense, as an involuntary filing under Chapter 13 would create a human receivership consisting of the bankruptcy trustee and the bankruptcy judge. If the creditors are successful in forcing a Chapter 7, the assets of the debtor, excluding available exemptions, will be sold and distributed by the trustee to the various creditors in satisfaction of their claims. Again, the reality is that very few debtors will have qualified assets available for distribution. Most voluntary Chapter 7 filings are 'no asset' filings.

The debtor's perspective:

The debtor, whether it admits to its creditor or not, realizes that repayment of the debt, as it stands, will be impossible. There are some strategic moves that a debtor may invoke in order to find a resolution. These may include: (1) Dealing directly with the creditor in an attempt at reorganizing the amount owed (usually by wiping out interest), and working out a payment plan regarding this new amount; (2) Hiring a credit agency to work with the creditors. Often the credit agency can greatly reduce payments and consolidate the debts. The creditor should be anxious to work out an arrangement, as the alternative may be that the creditor gets nothing at all; and (3) The filing of a Chapter 7 or Chapter 13 bankruptcy petition. If the debtor can qualify for protection under Chapter 7, as these qualifications have become greater, then the debtor may be able to avoid, in whole, its obligations to its unsecured creditors. The debtor may also propose a plan under Chapter 13, in which most, if not all, of its debts will be paid its creditors over a 3 to 5 year plan. Generally, a debtor will file a Chapter 13 plan when it owns property with equity. In other words, the property has an equity cushion that may be used to satisfy creditor claims if the debtor were to file under Chapter 7, liquidation. If the creditors agree to the Chapter 13 plan, as proposed, the debtor will not lose his home through a forced sale by the bankruptcy trustee, as would be the case under Chapter 7. Bankruptcy procedures are highly complex and, as such, will be the topic of later articles. It is enough to say that creditors are wary of the protections of United States Code, Title 11 - Bankruptcy, which are often invoked by debtors in distress.

Result:

Unfortunately, there are no quick and easy answers when a debtor comes into financial difficulty. The relations between a debtor and a creditor, as shown, can be very complicated. Although a debtor is under an obligation to pay what it has charged, the creditor is also under an obligation to properly determine the creditworthiness of an applicant before it approves the application. The remedies I have written of, certainly not comprehensive, were outlined to give the reader an elementary understanding of the relations that develop between the debtor and creditor when the obligations of the debtor are not being met. Unfortunately, at the end of the day, the creditor may get nothing, and the debtor may wind up with destroyed credit. That's a lose-lose situation. My question: Do you really need that credit card?

Additional information:

Let me distinguish between an unsecured debt and a secured debt.

An unsecured debt is a debt that is not attached to any particular property of the debtor. It is a debt that is not collateralized. A credit card, the topic of this article, is the best example of an unsecured debt. If the debtor defaults, the creditor has no immediate legal property interest that it can foreclose on.

A secured debt is a debt that is attached to a particular piece of property of the debtor. A mortgage is the best example of a secured debt. The owner's land is offered as collateral against the loan. If the debtor defaults, the creditor may foreclose the loan and sell the land in satisfaction of its claim.

In my next article I will discuss the mortgage.

Take care - 'los lonely boy'