I) Creditors

A) Secured Debts
a) when someone borrows money, they go in debt to a creditor (today, usually a bank)
b) small amounts, like what’s used in credit cards, are protected by insurance
c) large amounts, like when buying a car or house, carry liens
(i) a lien is a legal right of the creditor to sell the property to use the money to pay
the debt
(ii) if someone misses even a single payment, it is possible to lose the property legally
1 this almost never happens on the first missed payment, but usually after 3-4
the bank begins looking at reclaiming the property
B) Pledges
a) this happens when a debtor wants to borrow money or buy something and puts
something they own up as collateral
(i) once the debt is paid, ownership of the collateral property is returned
b) pledges often happen with pawnbrokers
(i) a person gives over something like jewelry, technology, etc in exchange for cash
1 when the person repays the debt with interest, they can reclaim the property
(ii) often pawnbrokers have been used to sell stolen goods, and therefore many laws
exist to encourage pawnbrokers to be careful in taking in items
1 if stolen goods are discovered, they can be taken without compensation
C) Involuntary Liens
a) if someone doesn’t pay for labor or materials used to build a structure, the builder can
sue to sell the property
(i) if successful, the builder is then paid before the bank who may own the mortgage
on the property
b) if a service is not paid for, the one providing services can hold the property until the
service is paid
D) Third Parties
a) many large companies don’t want to go through the process of collecting on all small
debts, and therefore have agreements with third parties to do the small work for them
(i) for instance, AT&T may not want to bother collecting a $300 bill from a customer
who is behind on payments, and will hand over the contract to a smaller company
willing to collect the money
1 that small company keeps any legal fees they collect from the customer minus
the original amount to be paid to the parent company
E) Unsecured Debt
a) while secured debt is done in writing, unsecured debt is usually an oral promise, and
therefore much weaker in court
(i) more often, unsecured debt is written off as an expense of doing business
II) Debtors and Credit Cards
A) Maximum Interest Rates
a) banks and credit companies cannot charge interest above the state maximum (with
exception of title loans, payday loans, etc)
B) Disclosure Requirements
 a) companies lending money to individuals must clearly state the amount of interest
charged on the principal amount loaned and the amount of time the debtor has to pay
the loan back
(i) on medium sized loans, like with cars, usually the lender requires a down
payment in addition to a signed agreement for length of time and amount to be
paid monthly
1 if paid monthly, the total amount paid will be significantly higher than if paid
in full
 how much higher depends on the length of time and the interest rate
C) Laws Against Credit System Abuse
a) Federal Equal Credit Opportunity Act
(i) protects against discrimination based on race, sex, marital status, etc
b) Federal Fair Debt Collection Practices Act
(i) companies (especially third parties) can’t harass people, use threats, use profane
language, contact friends, family, or work, etc in order to collect on a debt
1 harassment is difficult to prove, and therefore they often ignore that one
c) Federal Fair Credit Billing Act
(i) companies must mail bills 14 days before due, must answer billing questions
within 30 days, and must settle disputes within 90 days
d) Federal Fair Credit Reporting Act
(i) set up the credit rating system designed to protect both creditors and debtors from
people unlikely to pay back loans
1 a low credit score means a person can be denied a loan or can be charged a
higher interest rate than someone with good credit in order to protect the
company from people who would cheat them
 this in turn protects borrowers who are likely to pay money back, as it
keeps their interest rates as low as possible
D) Credit Cards
a) credit card companies have special protections against fraud
(i) lost or stolen cards must be reported quickly in order to protect the cardholder
from being held responsible for any fraudulent charges
(ii) the larger the credit card company, the more likely they are to actively protect
their uses from fraud (often they will contact you if something looks off)
III) Bankruptcy
A) Types
a) Chapter 7
(i) straight bankruptcy- sale of property to cover debts, and usually remaining debts
are cancelled
b) Chapter 11
(i) reorganization- special type that protects businesses and reduces bills if agreed
upon
c) Chapter 13
(i) extended time- if circumstances are right, it gives borrowers more time to pay
B) Effects
a) debts are paid as much as possible and then forgiven, but an individual cannot borrow
money nor repair credit for at least 7 years after officially claiming bankruptcy