The relationship between a creditor and a debtor is one
of the most important to understand in terms of business practices of any kind.
This is because most business transactions result in some form of debt for a
given party, and even individuals outside of business practices are often debtors,
whether to a credit card company or to a bank.
Creditors are those to whom something is owed by the
debtors, and therefore, the relationship between creditors and debtors is substantially
complicated by the conflicting interests of the two parties. A creditor might
be willing to seize anything and everything that he or she has to in order to
obtain adequate compensation for the debt owed to him or her by the debtor.
A debtor, on the other hand, wants to protect his or her
property from being seized by a creditor unnecessarily. A debtor cannot simply
shirk the debt owed to the creditor, but the debtor does not want that debt to
result in undue action on the part of the creditor. Thus, the law attempts to
serve the interests of both parties, allowing the creditor to collect on the
debts, while protecting the debtor from undue action.
The law provides for a creditor to fall into one of two
categories. Either the creditor is secured or he or she is unsecured. An
unsecured creditor is owed by the debtor, but no particular property or asset is involved in the debt. In other words, the debtor does
theoretically have to pay off the creditor, but there is no agreed upon asset
owned by the debtor which he or she must use to pay off his or her creditor.
A secured creditor, on the other hand, has a claim on a
certain asset built into the debt. This means that the secured creditor can
take that particular asset in order to ensure that the debt is paid by the
debtor. An unsecured creditor can become a secured creditor by gaining a lien
against the debtor’s property. Such liens can sometimes be obtained through a court proceeding, determining
that the creditor is owed by the debtor, and therefore, deserves a lien.
Although
it may seem like the law solely
lands in favor of the creditor, the law actually protects
the debtor as well. Some liens which a creditor can obtain at the time of the
loan will allow the debtor to negotiate exactly what property is at stake in
the loan, thereby protecting any other property he or she might have. The
government also creates exemptions for loans, such that certain types of
property will not be seized by the creditor for any debt.
An important example of an exemption is the homestead
exemption, which ensures that a creditor cannot seize a debtor’s home unless
that creditor holds the mortgage to the home. In other words, homes are
generally off-limits, except for those loans which specifically make the
debtor’s home payable to the creditor.
In any particular instance, if the debtor does not pay
the debt in a fashion agreed upon in the original formation of the debt, the
primary way for the creditor to obtain payment is to take the debtor to court.
If the creditor has ample evidence, then he or she should be able to
successfully prove that he or she is owed money by the debtor and should either
obtain a lien against some property of the debtor or have a lien enforced. If,
on the other hand, a debtor is trying to protect him or herself from a
creditor, the court is the primary means to do so, although in general the
burden of proof will be on the debtor. If the creditor already has a
lien against certain property, then the creditor may seize that
property without needing to go to court.
