Legal Rights of Debtors and Creditors--Impact of Debtor/Creditor Relationship on Personal Property

Abstract

The financial stress and economic difficulties which characterized sectors of the agriculture industry during the 1980s may continue to trouble some producers into the 1990s as a result of drought and international competition. This report explains legal alternatives available to creditors for using a borrower's personal property to satisfy debt secured with personal property as well as unsecured debt. A debt is secured when a creditor has a lien; that is, the legal right to seize and use some of the borrower's property to pay an obligation. An unsecured debt is not accompanied with a legal right entitling the creditor to seize some of the borrower's property if the obligation is not paid. Instead, a creditor must convince a court that an amount is owed, but unpaid. The creditor will then proceed to collect payment as prescribed by statute and the court. The two most common means for a creditor to acquire a lien are 1) for the borrower to voluntarily grant a lien (a voluntary lien), and 2} for the creditor to acquire a lien according to statutory law and without the borrower's consent. This second category of liens is often referred to as statutory, involuntarily, or nonconsensual liens. The most common statutory liens that apply to agriculture in North Dakota are the agricultural supplier's lien, agricultural processor's lien, and agister's lien (which encumbers livestock being kept or fed for their owner). The typical voluntary lien to encumber personal property is a security interest which empowers creditors to repossess the encumbered property as long as there is no breach of the peace. The alternative for creditors is to rely on the judicial proceeding of claim and delivery to seize the property. The law specifies limitations as well as protection for debtors. For example, a debtor is not relieved of an obligation even though the debtor's assets are not sufficient to pay the obligation. Likewise, a debtor cannot give away property to frustrate a creditor's collection attempts. However, a debtor is allowed to retain exempt assets; that is, those items state statutory law specifies as beyond the reach of creditors. Exempt personal property includes the family's clothing; one year's supply of provisions for the family (including fuel); a trailer, mobile home, or $7,500 (substitute for a homestead); property valued between $5,000 and $8,000 ($2,500 for a single person); a vehicle up to $1,200 in value; and certain pensions, annuities, life insurance policies, retirement accounts, and limited payments from specified pension programs (such as social security). Financial disputes are not limited to debtors and creditors. Creditors also compete with each other to collect their obligation from the borrower's assets. Such conflicts are resolved according to the priority of the creditors. Few financial disputes will be litigated; instead, most culminate with the parties negotiating a settlement that is preferrable to litigation. The parties must fully understand their legal rights and the likely result of litigating (including the cost and time necessary to litigate), however, in order to recognize an acceptable settlement.