- Personal Finance
Understanding Debt in Law
Debt, in law, ordinarily means a legal obligation solely to pay money, either now or later. If payable now, it is a 'debt due'; if payable later, it is a 'debt owing'. Money payable on the occurrence of a contingency becomes a debt when the contingency occurs (A lapse of time is not a contingency in the law). The sum of money must be certain in amount or readily reducible to certainty by mathematical calculation. The legal obligation to pay must be certain. A legal obligation connotes a legal duty to perform, whether to pay a debt or to do something else; debt is a legal obligation solely to pay money.
While ordinarily debt is understood to arise out of a contract, either express or implied, the term often is applied to other occasions or transactions that give rise to the legal obligation solely to pay money, such as a judgment to pay a certain sum of money for negligently causing harm to another. By statute or judicial decision the word "debt" has been given a narrower or wider meaning for particular purposes.
Generally, the 'debtor' owes the debt and the 'creditor' is the person to whom the debt is owed. However, in the United States, under the 1962 Uniform Commercial Code, Article 9, on secured transactions, a debtor "means the person who owes payment or other performance of the obligation secured, whether or not he owns or has rights in the collateral, and includes the seller of accounts, contract rights or chattel paper..."
Conditions Producing Debt
Debt generally results from the debtor having received something from the creditor for which the debtor is to make payment at a later time. Often a loan of money creates the debt, repayable with interest. Failure to repay has created penalties that have varied among different peoples. At one time, debt bondage existed: the debtor defaulting on a contract obligation either became a slave for varying periods of time, or was sold into foreign slavery, or was imprisoned. Today debt bondage does not exist in the United States, and by contrast, for example, discharge in bankruptcy gives the defaulting debtor an opportunity to be freed from certain debts.
Creditors now must resort primarily to property or sureties as security for payment of debt. Such security may be made a part of the initial transaction, or the creditor may proceed later by taking legal action against the debtor's property.
By statute, a creditor may collect a debt by resorting to the debtor's property in various ways. The usual methods are by writs (that is, writings) of execution, garnishment, or attachment and by creditor's bill. Although statutes differ in the type and extent of property that they exempt from such methods and in some procedural aspects, generally they are similar. A creditor cannot seize the property of his defaulting debtor without a legal proceeding to establish the debt, default, and right to a proper legal remedy.
The creditor brings a legal action against the defaulting debtor and replaces the debt with a judgment. The debtor is now a judgment debtor, the creditor, a judgment creditor. Statutes usually provide that the docketing of a judgment causes it to become a lien on any real property of the judgment debtor, if that property is situated in the county where the judgment is docketed; in some states the lien is on personal property also. If the judgment debtor ills to satisfy the judgment, the judgment creditor has the right to have the court issue a 'writ of execution'. This directs the sheriff (or marshal, if in a federal court) to levy upon and seize as much of the judgment debtor's nonexempt property as is necessary to satisfy the judgment; to sell it at public sale; to deliver proceeds sufficient to satisfy the judgment either to the judgment creditor or to the court when so required; and to deliver any surplus to the judgment debtor. The latter usually has a short statutory period of time in which to redeem the real property thus sold.
Certain types of property representing intangible claims of the judgment debtor against third persons cannot usually be reached by the writ of execution. For example, the sheriff cannot physically seize debts owed to the judgment debtor or chattels owned by him but "lawfully possessed" by others. Without a statute to the contrary, such property of the judgment debtor is generally not available to satisfy the judgment unless a writ of execution is first returned unsatisfied and unless it is proved that no other property of the judgment debtor is available to satisfy the judgment. If this is the case, the judgment creditor has the right to have the court issue a writ of garnishment directing the third person, called a "garnishee," to appear in court and testify. The court may order that money owed by him to the judgment debtor, or the latter's chattels, be made available to satisfy the judgment.
If none of these remedies satisfies the creditor's judgment, by statute a creditor's bill may be available to reach property of the debtor not exempt by statute, such as equitable interests in land or personal property.
If statutory grounds are present, the creditor may have the court order the levy and seizure of the debtor's property, or its garnishment, after a legal action has begun but before judgment is rendered. Since the debtor's property is being seized before adjudication, the creditor is required to post a bond to protect the debtor from loss occasioned by the seizure of his property and for court costs if the creditor should not obtain a judgment. Generally, the statutory grounds in such seizure are that (1) the debtor cannot be served with a summons; (2) he is a nonresident of the state where the legal action has begun; (3) he has made, or is about to make, his property unavailable to his creditor; or (4) he has made, or is about to make, a fraudulent conveyance of his property. The court will issue a writ of attachment directing the sheriff to levy upon and seize such of the debtor's property as is necessary to satisfy the creditor's demand, or the court's writ may be in the nature of garnishment directed to a garnishee. On the creditor's obtaining a judgment, the property is used to satisfy the judgment.