CPA REG Business Law Notes: Debtor–Creditor Relationships

Debtor

A party who owes an obligation, typically money, to another party.

Creditor

A party to whom an obligation is owed, typically in the form of money or services.

Unsecured Creditor

A creditor with only a contract claim (IOU) without rights to specific property.

Secured Creditor

A creditor with a claim to specific property (collateral) that can be taken if the debtor defaults.

Collateral

Specific property secured against a debt, which the creditor can take if the debtor defaults.

Default

Failure to fulfill a debt obligation, often defined by contract.

Attachment

The moment a security interest becomes enforceable against the debtor regarding collateral.

Perfection

The legal step that makes a secured interest effective against third parties.

Priority

The order in which creditors are paid when multiple creditors claim the same asset.

Financing Statement (UCC-1)

Public notice document filed to perfect a secured interest.

Purchase Money Security Interest (PMSI)

A security interest in collateral that enables the debtor to purchase said collateral.

Commercially Reasonable

Acting in a manner consistent with standard business practices during sale or repossession.

Breach of Peace

A legal restriction that limits how a creditor can repossess property.

Judgment

A court's decision in favor of one party in a lawsuit, enabling creditor recovery actions.

Garnishment

A post-judgment remedy allowing creditors to intercept debts owed to the debtor, like wages.

Lien

A legal claim against property to secure payment of a debt.

Mechanic’s Lien

A lien that protects those who provide work or materials to improve real property.

Exempt Property

Assets a debtor may retain even after a judgment against them, like certain household goods.

Automatic Stay

A legal pause on collection activities once a debtor files for bankruptcy.

Bankruptcy Estate

The total property owned by a debtor at the time of filing for bankruptcy.

Discharge

A release from personal liability for many debts, often allowed in bankruptcy cases.

Guaranty

A promise by a third party (the guarantor) to pay a debtor's obligation if the debtor fails to do so.

Modification of Debt

Changes made to the terms of a debt that can affect guarantor liability.

Impairment of Collateral

Actions taken by a creditor that reduce the value of the collateral, potentially affecting the guarantor's exposure.

Self-Help Repossession

The ability of a secured creditor to take possession of collateral without legal proceedings, provided there is no breach of peace.

Secured Transactions

Legal agreements where a creditor obtains a security interest in specific collateral as part of the debt agreement.