1
Chapter 29
Creditors’ Rights
and Remedies
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
B1. With a mechanic’s lien, real estate becomes security for a debt.
B2. Liens generally take priority over other claims against the same property.
B3. Creditors who have a perfected security interest in a debtor’s property normally
take priority over mechanic’s and artisan’s liens.
B4. A writ of attachment is a court order that directs a sheriff to seize and sell the
debtor’s nonexempt property either at the time a lawsuit is filed or immediately
afterward.
2 TEST BANK B—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
B5. A writ of execution applies to a debtor’s nonexempt real or personal property
wherever located.
B6. Only a few types of property—a debtor’s wages or bank account, for
example—can be garnished.
B7. Bothe federal and state laws expand the amount that can be taken from a
debtor’s weekly take-home pay through garnishment proceedings.
B8. Recording a mortgage perfects the lender’s security interest in the mortgaged
property.
B9. If a homeowner defaults, or fails to make the mortgage payments, the lender
has the right to foreclose on the mortgaged property.
B10. Forbearance is a postponement of part or all of the payments on a loan for a
limited time.
B11. The lender does not have to strictly comply with the state statute governing
foreclosure—substantial compliance is sufficient.
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 3
B12. Suretyship and guaranty provide debtors with the right to seek payment from a
third party if the debtor, or principal, desires to default on his or her obligations.
B13. A surety can be required to pay an obligation only after the principal debtor
defaults and usually only after the creditor has made an attempt to collect from
the debtor.
B14. A guaranty contract between the guarantor and the creditor need not be in
writing or electronically recorded to be enforceable unless the main purpose
exception applies.
B15. When a surety or guarantor pays a debt owed to a creditor, he or she acquires
any right that the creditor had against the debtor.
B16. A surety cannot assert the principal debtor’s bankruptcy as a defense to avoid
liability on the debtor’s obligation.
B17. A surety is entitled to receive from the debtor the actual amount of the debt
paid to the creditor on behalf of the suretyship arrangement but not other
expenses incurred.
B18. The purpose of the homestead exemption is to ensure that the debtor will retain
some form of shelter.
4 TEST BANK B—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
B19. The homestead exemption interacts with other areas of the law and can
sometimes operate to cancel out a portion of a lien on a debtor’s real property.
B20. Personal property that is most often exempt from satisfaction of judgment debts
does not include equipment that the debtor uses in a business or trade.
MULTIPLE CHOICE QUESTIONS
B1. Builders Construction Company performs a contract with Christina to add a sun
porch to her house, but she does not pay. In most states, Builders Construction
could create a lien and place it on Christina’s property by filing
a. a creditor’s composition agreement.
b. a writ of attachment.
c. a writ of execution.
d. a written notice of lien.
B2. Portia owes Bon $500 on their roof repair contract, but refuses to pay. To
collect, Bon files a mechanic’s lien. Under a mechanic’s lien, security for the
debt is represented by
a. Portia’s personal property.
b. Portia’s real estate.
c. the $500 owed under the contract.
d. the contract.
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 5
B3. Lyndon owes $10,000 to Metro Bank. As a prejudgment remedy to collect the
debt, Metro could use a writ of
a. contribution.
b. attachment.
c. execution.
d. subrogation.
Fact Pattern 29-1B (Questions B4–B5 apply)
Michael contracts with Jill to fix the brakes on her Honda Civic. Jill leaves her car with
Michael, but refuses to pay when the work is done.
B4. Refer to Fact Pattern 29-1B. Michael refuses to return the car to Jill until she
pays for the brake work. This is
a. a garnishment order.
b. a mechanic’s lien.
c. an artisan’s lien.
d. a violation of most states’ laws.
B5. Refer to Fact Pattern 29-1B. If Michael imposes a lien on Jill’s car, it will end
a. in thirty days.
b. in sixty days.
c. when Michael voluntarily surrenders possession of the car.
d. when Jill obtains a court order requiring Michael to return the car.
B6. A court awards a judgment to Loan Collection Agency, who is the creditor,
against Margret, who is the debtor. After the judgment, the creditor requests a
court order to seize Margret’s property to ensure that the judgment will be
collectible. This is
a. a judicial lien.
b. a writ of attachment.
6 TEST BANK B—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
c. a writ of execution.
d. a violation of most state laws.
B7. Ronaldo’s debt to Sofia is past due. Ronaldo obtains a judgment against Sofia
to collect the debt, but Sofia will not pay. Ronaldo requests a writ of execution.
The property that is seized under the writ of execution must be
a. in Ronaldo’s possession.
b. in Sofia’s possession.
c. in the possession of Sofia’s employer or other third party.
d. located within the court’s geographic jurisdiction.
B8. Stanley’s debt to Town Bank is past due. Town Bank obtains a judgment
against Stanley to collect the debt, but he refuses to pay. Town Bank asks the
court to order Stanley’s employer to pay a portion of his paycheck to the bank.
This is a request for
a. a mechanic’s lien.
b. an order of garnishment.
c. an order that would violate most state laws.
d. a writ of attachment.
B9. George borrows funds from Hometown Credit Union (HCU) to buy real
property. George signs a written instrument that gives HCU an interest in the
property as security for the debt’s payment. This is
a. a mortgage.
b. an artisan’s lien.
c. a workout agreement.
d. a suretyship arrangement.
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 7
B10. Ridgeline Bank provides Shirley with a mortgage to buy a home. The rate of
interest is fixed for three years and then adjusts annually. This is
a. a fixed-rate mortgage.
b. an adjustable-rate mortgage.
c. a creditor’s composition agreement.
d. a guaranty agreement.
B11. Vito borrows $110,000 from Watershed Bank to buy a home. If he fails to make
payments on the mortgage, the bank has the right to repossess and auction off
the property securing the loan. This is
a. a short sale.
b. forbearance.
c. foreclosure.
d. the right of redemption.
B12. Erin and Dooley, a married couple, borrow $120,000 from Capital & Credit
Bank to buy a home. When Erin and Dooley divorce, they are unable to make
payments on the mortgage. The market value of the home has declined to less
than the balance of the loan. Capital & Credit agrees to a sale of the property
for this amount. This is
a. a prepayment penalty.
b. forbearance.
c. foreclosure.
d. a short sale.
B13. Gena borrows $350,000 from Fish Island Bank to buy a home, which secures the
mortgage. In the seventh year of the loan, Gena stops making payments. After the
bank repossesses the property but before it is sold, Gena may buy it by paying
a. an amount that equals the potential proceeds from the property’s sale.
b an amount that exceeds the potential proceeds from the property’s sale.
8 TEST BANK B—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
c. the amount of the missed payments, but not more.
d. the full amount of the debt, plus any interest and costs.
B14. Pippin signs a lease on behalf of Quixotic Games, Inc., with Riverview Office
Suites. As part of the lease, Pippin signs a document titled “GUARANTY.” If
Quixotic Games stops paying the rent, it is most likely that liability or loss for
the unpaid amount will rest with
a. no one.
b. Pippin and Quixotic Games.
c. Riverview Office Suites.
d. the other tenants on the same property.
B15. Dina asks Edie to co-sign a credit application so that she can borrow money
and buy a piano from First Chair, a musical instruments and supplies seller. If,
after the loan agreement is signed, Dina agrees to a higher rate of interest
without telling Edie, then Edie is
a. discharged from the agreement.
b. liable at the higher rate of interest.
c. liable at the lower rate of interest.
d. liable for the principal only.
B16. Jordan is a surety for Kelly’s loan from Lenders Credit Corporation. When the
loan comes due, Kelly tries to pay Lenders Credit, but the creditor rejects the
payment. Jordan is
a. released from any obligation on the debt.
b. required to pay the amount of the debt to Lenders Credit.
c. required to pay up to half of the amount of the debt to Lenders Credit.
d. required to pay the amount of the debt to Kelly.
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 9
Fact Pattern 29-2B (Questions B17-B19 apply)
Robin’s home is in a state that has a $30,000 homestead exemption. Robin defaults
on a $60,000 debt that she owes to Suburban Mortgage Company. Robin’s home is
sold at auction for $80,000.
B17. Refer to Fact Pattern 29-2B. Suburban Mortgage may recover
a. $0.
b. $30,000.
c. $50,000.
d. $60,000.
B18. Refer to Fact Pattern 29-2B. Robin will receive
a. $0.
b. $30,000.
c. $50,000.
d. $60,000.
B19. Refer to Fact Pattern 29-2B. If Suburban Mortgage recovers less than it is
owed, it can realize the difference from
a. any property that Robin owns.
b. only exempt property that Robin owns.
c. only nonexempt property that Robin owns.
d. property that any other member of Robin’s family owns.
B20. Beatrix defaults on a debt to Credit Loan Corporation (CLC). As a creditor, CLC
can place liens on all of Beatrix’s property except
a. motor vehicles used to commute to work.
b. stock in various corporations.
c. items that the debtor selects.
10 TEST BANK B—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
d. vacant commercial property.
ESSAY QUESTIONS
B1. The roof in Rosalyn’s house springs a leak. She contracts with Shelter Roofing
& Restoration Company to repair the roof and fix the damage to the house.
Rosalyn pays 10 percent of the price in advance. Shelter Roofing does the
work, but Rosalyn refuses to pay the rest of the price. What can Shelter
Roofing do, and how is it done?
B2. Rashi is a student at State University. In need of funds to pay for tuition and
books, Rashi asks Tiempo Loans, Inc., for a short-term loan. The lender agrees
to make a loan if Rashi will have someone who is financially responsible
guarantee the loan payments. Umberto, a well-known businessperson and a
friend of Rashi’s family, calls Tiempo and agrees to pay the loan if Rashi
cannot. Because of Umberto’s reputation, the loan is made. Rashi is making
the payments, but because of illness he is unable to work for one month. He
asks Tiempo to extend the loan for three months. The lender agrees, raising
the interest rate for the extended period. Umberto is not notified of the
extension (and thus does not consent to it). One month later, Rashi drops out
of school. All attempts to collect the remainder of the loan from Rashi fail. Can
Tiempo assert a claim against Umberto on the debt?
CHAPTER 29: CREDITORS’ RIGHTS AND REMEDIES 11