Practical Application: Understanding Debt Collection & Repossession Rights

Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

When a party fails to abide by a contract's terms via non-payment, a debtor has still rights that must be respected by creditors. These scenarios will allow you to apply your knowledge of creditor and debtor rights and responsibilities.

The Rights and Responsibilities of Debtors and Creditors

It's an unavoidable fact that many parties fail to perform their contractual obligations. When a party fails to abide by a contract's terms via non-payment, a debtor has rights that must be respected by creditors. This notwithstanding, there are legally permissible ways for a creditor to a debt.

Creditors may be entitled to take control of assets or other things of value relating to the contract's terms. Similarly, the debtor still retains rights that protect them from harassment or criminal actions by the creditor. For a brief review of these conditions, you might want to revisit the lesson Debt Collection and Repossession Rights.

Although this is by no means a comprehensive list, here are few of the rights and remedies that apply to debtors and creditors.

Creditor Remedies Debtor Rights
If the money owed is secured, the creditor may take possession of the asset(s) used as collateral. A creditor is prohibited from engaging in criminal activity to facilitate the seizure of a debtor's property.
A creditor may take possession of an automobile that is the subject of the loan. The creditor cannot seize the car if the debtor is physically in the vehicle.
If the subject of a contract is a mortgage, the creditor may take possession of the property and re-sell it. If the debtor occupies the residence, the creditor's repossession must take place in compliance with local eviction laws.

To apply your knowledge, read and analyze the scenarios below. Consider how the rights of both debtors and creditors are or are not being respected in each of the fictional instances.

Scenario 1: A Cosigners' Responsibilities

After nearly five years of being at or above capacity, a local mosque is ready to expand. This planned expansion will temporarily relocate the mosque while a new facility is being built on the existing site. As part of the contract, the bank that is financing the project required 10 credit-worthy cosigners for the new mortgage. The religious community's leaders approached their members, and the required cosigners quickly volunteered cash and other assets to back the mortgage.

In an extremely unfortunate occurrence, the general contractor constructing the new building suddenly disappeared, leaving the unfinished building behind. Although this was a clear case of criminal fraud, the bank holding the mortgage still demanded payment. In an effort to honor their contract with the bank, the materials for the building under construction were sold. Unfortunately, even after the sale, the bank was still owed a little more than $15,000.

  • Who or what entity is responsible for this balance?
  • What will happen if the outstanding balance is not paid?
  • What are some of the terms used to accurately describe the events in this scenario?

The Creditor's Remedies

Primarily, the mosque itself (in its capacity as an organization) is responsible for the repayment. However, if it is unable to do this, the cosigners will be obligated to do so. Note that in this scenario, the mosque sold the building materials themselves. Had the organization not done this, the bank would have had the legal right to take possession of the materials and dispose of them in whatever way was most advantageous for it.

The Debtor's Rights

Even though it owes money, the mosque is protected from certain actions by a creditor. First, a creditor will not be permitted to gain access to the property using physical force or threats of violence. The creditor can't break into a building, drive through a fence, or scale a wall to reach assets they intend to repossess.

Here are the specific issues and terms related to this situation:

Term Example in the Scenario
Criminal Fraud The contractor received payment for services that were not rendered as required.
Collateral Anything of value (building, building materials, personal assets of the cosignors) used to secure a loan.
Deficiency The amount a debtor still owes a creditor after all collateral has been applied to the debt.
Default The condition that results if a debtor does not make the required payments to a creditor.

Scenario 2: Purge and Splurge

Like a lot of start up businesses, Fix-It-Fast Automotive Experts wasn't going to make it. Jim, the sole proprietor by default, had purchased some warehouse space and was ''in business.'' Also like a lot of entrepreneurs, Jim didn't incorporate as a business. This meant that Jim's personal assets and business assets were not legally differentiated.

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