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Q. What makes a creditor secured?
A. Secured creditors possess specific legal rights to take back ownership
of an asset should the debtor default on the corresponding security agreement
Q. How do they obtain these rights?
A. Most times the debtor grants them in consideration for the creditor
giving them a loan to purchase the asset.
Q. Can you give some examples?
A. The mortgage holder on a house, a leinholder on a car, a commercial
loan secured by the inventory and receivables of a business.
Q. Is there a way for a creditor to obtain secured rights without
the debtor's permission?
A. Yes, there are Mechanic's leins for creditors who have done work to
a vehicle or property and governmental tax leins. Also, the courts can
grant any creditor an attachment pending a trial or an execution after
a judgement has been awarded. When recorded properly at the registry of
deeds these vest secured rights in the creditor which may give the creditor
even more rights than a mortgage holder.
Q. How can they get more rights?
A. Mortgages usually secure only a single asset, an attachment or execution
can encumber every property owned by a debtor recorded at the registry
of deeds where the attachment or execution is recorded. The creditor may
gain even more rights by recording at more than one registry. Fortunately
for the debtor, attachments and executions usually end up in a low priority
position.
Q. What does priority position mean?
A. I like to describe priorities as a line. Imagine when you sell your
house the buyer puts a pile of cash on the closing attorney's desk. Then
everyone who wants any of it lines up in a specific order called "priority".
Q. How would this work in a normal setting?
A. First in line comes the city or town for municipal taxes. Next steps
up the first mortgage holder followed by the second mortgage holder, if
any.
Q. My home equity loan is really a second mortgage, right?
A. Yes, most of the time that will be the case.
Q. What about my equity in the house?
A. You stand at the end of the line. Any money left when it's your turn
goes to you.
Q. How does this change with attachments, executions and tax leins?
A. As these things happen the secured creditors basically just get in the
line.
Q. Does it matter how much they are owed?
A. Not for priority, it's first come first served.
Q. What if there won't be any money left for me?
A. Then you no longer have equity in the house.
Q. What if more creditors join the line after there is already no
equity?
A. They have obtained a position with little or no value. When the money
pile has been fully distributed anyone left in line gets nothing. The person
in line when it runs out might not be paid in full.
Q. Does the rest of the debt go away?
A. Absolutely not. Once the security for the debt goes away it just becomes
unsecured debt.
Q. Where do the unsecured creditors stand in this line.
A. They don't, unsecured creditors have no right to be in line, that's
essentially the difference between secured and unsecured creditors.
Q. How do unsecured creditors get paid?
A. Either by you paying them volunarily or by court order. Remember, unsecured
creditors may also gain secured rights through the courts.
Q. What about the threats from the collection agencies?
A. They are exactly that, threats. Only a lawyer can back them up. If you
would like to enter into a payment plan sometimes these agencies can be
helpful. If you can not enter into a plan their only choice is to go away
or pass the case on to an attorney for the creditor.
Q. Can they still call me?
A. So long as it doesn't become harassment they may call occasionally to
check on your status. One of the bonuses of your hiring an attorney is
that you just tell the agency once to call your lawyer instead and you'll
never get a call from them again, it will be your lawyer's job to field
their calls.
Q. What are some examples of unsecured debt?
A. Most credit cards, debts to stores and money owed for services.
Q. Can some credit card debt be secured?
A. If the card was secured by a savings account then the debt is secured
up to the amount of the savings. Sears card holders should make special
note that Sears will consider major purchases such as appliances and computers
secured transactions under the terms of their credit agreement. I have
seen them go as far as claiming old tires and car batteries as secured.
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