Accounting Law - Chapter 28, Credit and Secured Transactions

Unsecured Credit

This is credit extended without requiring collateral. The lender gives money, goods, or services to the borrow based only on the borrower’s promise to repay.

This is at higher risk to the lender.

Creditor’s Remedies: Unsecured Credit Transaction default.

• The creditor may bring a lawsuit against the debtor and obtain a judgement.

• The creditor might then have the sheriff execute the judgement on any property owned by the debtor that is subject to execution.

• The creditor might also try to garnish the wages of other moneys to which the debtor is entitled.

Secured Credit

Credit that is backed by collateral. the borrower pledges specific property aka SECURITY INTEREST or COLLATERAL that the creditor has the legal right to seize and sell if the debtor defaults.

Who gets priority in bankruptcy?

Real Estate as a Security: 3 basic contract devices

1. The real estate mortgage

2. the deed of trust

3. the land contract.

Mortgage as a Security Interest

• Involves the borrower (mortgagor) and lender (mortgagee)

• Borrower gives the lender a mortgage as collateral for a loan.

• If the borrower defaults: Lender (bank) must go through judicial foreclosure: file a lawsuit, get a court order, and then sell the property.

• Key point: Common. Slower and more court-involved

Deed of Trust as a Security Interest

• Involves the Borrower (trustor), lender (beneficiary), and a neutral third party (trustee)

• Borrower gives title to trustee, who holds it as security FOR the lender.

• If the borrower defaults, the trustee can sell the property through a non-judicial foreclosure (no court needed)

• Key point: faster and cheaper foreclosure than mortgages.

Land Contract as a Security Interest.

• Involves only the Buyer and Seller

• Seller finances the sale directly. Buyer makes installment payments to seller. seller keeps legal title until buyer pays in full. But the buyer still has the right to use the property.

• If buyer defaults: Seller can cancel the contract and keep payments already made

• Key point: No bank needed, more flexible, but riskier for buyer since they don’t get full ownership until final payment,.

Legally Enforceable Mortgage Requirements.

• Contains the name of the secured party (CREDITOR)

• Contains the legal description of the property.

• Contains the terms and conditions of the security interest in the property

• Must be signed by debtor/owner of RECORD OF the property.

• Most states require notarization.

What does Recordation do (mortgages)

Recordation is the process of officially filing a mortgage with the local govt office that keeps real estate records. 

It gives pubic notice that the lender has a claim on the property.

It protects the lender’s rights and priorities against other creditors.

What is Foreclosure?

the legal process by which a lender (or other secured party) enforces their right to take and sell property when the borrower defaults on a loan that is secured by real estate (like a mortgage or deed of trust).

Any rights of the mortgagor (borrower) are cut off.

Foreclosure by Action of Sale

The most common method. Legal in every state. In some states, its the ONLY legal method.

• Court process: Suit filed in court with jurisdiction.

• Defendants: All parties with an interest in the property must be named; they can raise defenses.

• Judgment: If foreclosure is granted, the court orders sale of the property.

• Proceeds:

  • First applied to the mortgage debt.

  • Surplus (if any) goes to the mortgagor (borrower).

• Deficiency judgment:

  • Entered if sale proceeds don’t cover the debt.

  • Not allowed when the property is the debtor’s residence (in most cases).es. If the court orders foreclosure, the property is sold. Sale proceeds go first to the mortgage debt, with any surplus returned to the mortgagor. If the sale doesn’t cover the debt, a deficiency judgment may be entered against the mortgagor or others liable, except usually when the property is the debtor’s residence.

Foreclosure by Power of Sale

• Allowed when the mortgage or deed of trust includes a “power of sale” clause. Notice must be given to borrower.

• No court action is required (faster and cheaper than judicial foreclosure).

• Process:

  • Lender or trustee gives notice of default and sale.

  • Property is sold at a public auction.

• Proceeds:

  • First applied to foreclosure costs and mortgage debt.

  • Surplus (if any) goes to the mortgagor (borrower).

• Deficiency judgment:

  • Mortgagee (lender) must bring it to court if they wish to recover.

Equity of Redemption

• The borrower (mortgagor) has the right to pay off the mortgage and reclaim full ownership of the property.

• Who can redeem:

  • The borrower or anyone with an interest in the property that would be lost in foreclosure.

• When redemption can happen:

  • Before foreclosure sale: Borrower pays the full debt + interest + costs to the lender.

  • After foreclosure sale (during statutory redemption period): Borrower pays the amount the buyer at the sale paid + interest to get the property back.

  • Redemption period is usually 6 months to 1 year (varies by state).

• How redemption works:

  • Must pay off the entire mortgage interest — partial payments or buying back only part of the property is not allowed.

• Effect of redemption:

  • Once the payment is made, the borrower clears the mortgage and regains full title to the property.

Parties to a Deed of Trust security

1. The owner of the property who borrows the money (debtor)

2. The trustee who holds legal title to the property (house) put up as security

3. The lender who is the beneficiary to the trust.

Once the borrower pays off the loan, the trustee gives full ownership back to the borrower.

Fiduciary meaning

• A fiduciary is someone you trust to do what’s best for you, especially with your money or property, and the law makes them legally responsible to act that way.

Examples: A trustee, a legal guardian, a lawyer or financial advisor.

Land Contracts as a Security Interest

Land Contracts are an installment contract where the buyer pays the purchase price over time, and the seller keeps legal title until full payment.

• Buyer’s role:

  • Takes possession of the property.

  • Pays taxes, insurance, and assumes other responsibilities of ownership.

• Seller’s role:

  • Keeps legal title until the buyer pays in full.

  • Can declare forfeiture if the buyer defaults.

• Default consequences:

  • Buyer’s rights can be cut off.

  • Many states allow a limited redemption period for the buyer.

  • Some states require foreclosure proceedings instead of automatic forfeiture.

  • If the buyer voluntarily surrenders possession, the seller’s title becomes absolute without court action.

• Legal formalities:

  • Should be in writing and recorded to protect both parties.

• Common uses: Often used for farm property purchases.