What Are Nonjudicial Creditors’ Remedies?
An attorney with experience in debtor-creditor law can advise both creditors and debtors about their rights and remedies with respect to overdue debts and help them maintain their financial integrity. When a debtor fails to pay his or her debts in a timely fashion, the person or business to which the debt is owed has several available remedies to help collect the money. Although there are formal creditors’ remedies that involve the courts, some methods do not require court involvement and are often referred to as self-help remedies.
Many creditors’ early attempts at debt collection do not involve the courts. First, the creditor may simply contact the debtor directly and demand payment, either using a collection letter or by telephone. At this point, the debtor may make the missed payments to bring the obligation current or the parties may be able to negotiate a revised, but mutually beneficial, payment plan.
If these more informal attempts fail, the creditor may transfer the debtor’s account to another business whose focus is debt collection. The federal Fair Debt Collection Practices Act (FDCPA) and some state laws prescribe how, when and where debtors may be contacted and prohibit deceptive practices. The FDCPA applies only to persons who regularly collect debts owed to someone else, called debt collectors, but not to creditors collecting their own debts.
When two parties owe each other money through different obligations and one of the parties becomes late in payment, the nondefaulting party may subtract, or set off, the amount overdue to him or her from the amount he or she owes the defaulting party. This is most commonly done by banks when a debtor defaults on a loan and the debtor also holds money in accounts at the same bank.
Some creditors require as a condition of debt that the debtor have a backup party legally responsible for the debt in case of default. This party may be called a third-party guarantor or a surety. Creditors can pursue collection from the guarantor or surety if attempts to collect from the primary debtor fail.
Some debts grant a security interest to the creditor in particular property owned by the debtor. This type of secured property is known as collateral. A creditor with a security interest generally has the right to seize the property to satisfy the secured debt upon nonpayment.
Repossession of pledged collateral, usually personal property, is a common nonjudicial remedy for nonpayment of the loan taken out to purchase the collateral. A familiar example of repossession is when an automobile dealer takes back a vehicle upon nonpayment of the car loan. In most states, the creditor may repossess property without getting a court order or giving the debtor notice as long as the repossession does not breach the peace.
Foreclosure, like repossession, involves the taking back of property that is secured by a loan, but foreclosures generally involve real estate or other real property. Some foreclosures are allowed by virtue of a power-of-sale clause in the mortgage and do not require court intervention, but others must be approved by the court and are more complicated procedures.
Another type of interest or lien that can be enforced to satisfy a debt arises in building construction, including mechanic’s or materialmen’s liens on the construction itself or on materials supplied to construction sites.
Remember, creditors’ remedies are governed primarily by state law, which can vary greatly from state to state. If you are a creditor undertaking self-help remedies or if you are a debtor facing such a situation, an experienced consumer law attorney can provide you with information about the law in your state.
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