Debtor-creditor law governs situations where one party, known as the debtor, is unable to pay a monetary debt to another, known as the creditor. Debtor-creditor law typically plays out through bankruptcy proceedings.
Creditors are split into three categories:
- The first category includes those who have a lien against a particular piece of property. This property (or proceeds from its sale) must be used to satisfy the debt to the lien-creditor before it can be used to satisfy debts to other creditors. A lien may arise through statute, agreement between the parties, or judicial proceedings.
- The second category involves creditors owning a priority interest. A priority arises through statutory law. For example, Congress granted priority to debts owed the Federal government through the Federal Tax Lien Act. If a creditor has a priority interest, their debt will be paid before non-priority debts can be paid.
- The final category of creditor is one who has neither a lien against the debtor's property nor a priority interest. These creditors can only be paid once liens and priority debts have been satisfied. Because insolvent debtors do not typically possess enough assets to pay off all their debts, this final category of creditors carry the greatest risk of not receiving the full value of the debts they are owed.
While much of debtor-creditor law focuses on bankruptcy proceedings, it also governs the ways a creditor can seek debt repayment from a non-insolvent debtor. Creditors seeking repayment can utilize either the court system or private sector debt collectors. Private sector debt collection is subject to the Fair Debt Collection Practices Act which seeks to prevent abusive practices.
The primary judicial remedies to enforce a debt are attachment, garnishment, and replevin.
- The remedy of attachment allows a creditor to seize the debtor’s property to satisfy a debt. Attachment is available only when authorized by statute.
- The remedy of garnishment allows a creditor to collect part of a debt from the monetary assets of the debtor. Typically, a party will seek to garnish the debtor’s wages or bank account. Garnishment of wages is heavily regulated and subject to strict limitations which vary from jurisdiction to jurisdiction. For example, in Delaware a party can only garnish up to 15% of a debtor’s net income.
- The remedy of replevin allows a creditor to seize property subject to a lien or other security interest. Frequently, property subject to replevin is sold at auction with the proceeds used to pay off the debt.
To avoid any of the above remedies, a debtor may attempt to fraudulently convey a piece of property. To prevent this conduct, many states have adopted the Uniform Fraudulent Conveyances Act or its successor, the Uniform Fraudulent Transfer Act.
[Last updated in September of 2022 by the Wex Definitions Team]
menu of sources
U.S. Constitution and Federal Statutes
- U.S. Code:
- Federal Tax Lien Act - 26 U.S.C. § 6321
- Fair Debt Collection Practices Act - 15 U.S.C. § 1692
- Consumer Credit Protection Act - 15 U.S.C. § 1601
- CRS Annotated Constitution
Federal Agency Regulations
Federal Judicial Decisions
- U.S. Supreme Court:
- U.S. Circuit Courts of Appeals: Recent Decisions on Debtor and Creditor Law
- Uniform Fraudulent Transfer Act
- New York Debtor and Creditor Law
- California laws regarding Special Relations of Debtor and Creditor - California Civil Code §§ 3429-3449
- State Civil Codes
State Judicial Decisions
- N.Y. Court of Appeals:
- Appellate Decisions from Other States
Key Internet Sources
- National Credit Union Administration
- U.S. Federal Trade Commission
- Debt and Collection Agencies (Nolo)
- Consumer Handbook to Credit Protection Laws (on-line pamphlet from the Federal Reserve)
Useful Offnet (or Subscription - $) Sources
- Good Starting Point in Print: Arthur Winston, Complete Guide to Credit and Collection Law, Aspen (2004).
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