Debtor–Creditor Law

Debtor–creditor law governs situations in which one party is unable to pay a monetary debt to another.
There are three types of creditors. First are 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.

Second are those who have a priority interest. A priority arises through statutory law. If a creditor has a priority, his debt must be paid when the debtor becomes insolvent before other debts. For example, Congress has granted priority to debts owed to the federal government.

Third are those who have neither a lien against the debtor's property nor are the subject of a statutory priority.

Non-bankruptcy debtor–creditor law arises mainly from state statutory and common law. Tort law, such as defamation, provides a means for state courts to limit private means of debt collection. States also regulate debt collection through statute. Congress has enacted the Fair Debt Collection Practices Act (fdcpa) to regulate some debt collectors.

Creditors use judicial and statutory processes to have debts satisfied. Attachment is a limited statutory remedy whereby a creditor has the property of a debtor seized to satisfy a debt. Garnishment allows a creditor to collect part of a debt (e.g., wages) to satisfy the obligation. Replevin allows a creditor to seize goods, such as a security interest, that he or she has a property interest in to satisfy the debt. Receivership involves the appointing of a third party by a court to dispose of the debtor's property in order to satisfy the debt. Creditors commonly seek to create a lien on a debtor's property through a judicial process of lien creation, which is governed by state law.

Once a lien has been created, state statutory law governs how the lien is executed against the debtor's property. The sale of property subject to a lien to satisfy the debt is also governed by state statutory law. Federal and state statutes along with the federal Consumer Credit Protection Act (ccpa) also limit the type of property that can be used to satisfy a debt.

A debtor may attempt to fraudulently convey a piece of property to avoid having it seized. State laws seek to prevent this type of property transfer. Many states have adopted the Uniform Fraudulent Conveyances Act or its successor, the Uniform Fraudulent Transfer Act.

Bankruptcy is governed by federal statute, which supersedes state debtor–creditor law in circumstances where it applies.

The content on this page was developed in partnership with the Legal Information Institute, Cornell Law School.