A531 Ch29–Debtor-Creditor Relationships

6 Types of parties in Debtor-Creditor Relationships?

1) Debtor

2) Creditor

3) Surety

4) Guarantor

5) Guaranty of Pmt

6) Guaranty of Collection

Define Debtor?

Person who owes debt (ex. Business borrows $20k)

Define Surety?

Person who takes responsibility for another’s debt, typically as a direct obligor

Define Guarantor?

Person who promises to pay if borrower fails, according to guaranty terms

Why is Surety considered Primary and Guarantor secondary?

Surety: Primary bc they sign exact same contract as principal debtor and share immediate liability from day one

Guarantor: Secondary bc they sign a separate contract and become liable after principal debtor defaults

List 4 Surety rights?

1) Subrogation

2) Indemnity

3) Contribution

4) Exoneration

Define Subrogation?

After paying, surety steps into creditor’s shoes to pursue debtor or collateral

Define Indemnity?

Surety seeks reimbursement from principal debtor

Define Contribution?

One co-surety who paid too much seeks a fair share from others

Define Exoneration?

Surety may seek relief against principal/obligation before having to bear debt

Define Letter of Credit (LOC)?

2 Definitions:
1) Bank/Issuer’s separate promise to pay on required presentation
2) Binding obligation for bank to pay 3rd party if bank’s customer can’t pay; creates loan between bank and bank’s customer
(Ex. Importer asks its bank for a LOC payable to an exporter. If exporter presents the required docs, the bank pays under the LOC; the importer reimburses the bank)

3 Parties in LOC?

1) Bank

2) Bank’s Customer

3) 3rd-Party

Is LOC the same as a guranty? Why or why not?

Guaranty: Backup person’s obligation’s tied to borrower’s failure to pay under guaranty’s terms
Letter of Credit: Issuing bank makes its own independent undertaking to pay when benficiary presents docs that comply w/letter