In what order do collateral and guarantees pay off a defaulted loan or bond? Company A is issued a loan that is guaranteed by Company B and is secured by liens on Company C's assets. Company A defaults on its loan. In what order are the collateral and guarantees used to pay off the creditors who own the loan? For example, is the collateral security from Company C used up completely first and then the guarantees from Company B relied on next, or is it pro-rata somehow between the security and guarantees, or something else entirely? Is there a standard part of an indenture or credit agreement where I can check this, or a convention if not?
To start with, this is a highly technical issue upon which different jurisdictions may differ, and in which different rules may apply in different circumstances either by agreement or by statute. Also, similar situations are sometimes treated differently in this regard in bankruptcy and out of bankruptcy. The majority rule is that the lender may choose which remedies - such as collateral and guarantee rights, to enforce, and the lender may choose in which order to enforce them. For example, most jurisdictions allow a lender to collect from a guarantor even when collateral is available to the lender, in lieu of foreclosing on the collateral. Sometimes, however, special rules apply. For example, if the guarantor is a government agency (e.g. the Small Business Administration or the Veteran's Administration), often the lender is required to take all reasonable efforts to collect from the borrower and recover the amount owed from collateral, before the guarantee can be invoked. Similarly, sometimes the law distinguishes between an accommodation party who receives no consideration in a transaction who signs as a direct debtor, and one who signs in a guarantor capacity. Those jurisdictions may require a good faith effort to collect from direct debtors (often including attempts to foreclose upon collateral) before attempting to collect from guarantors who sign as such. There are also arrangements, such as credit default swaps or a situation when a consumer provides a credit card payment authorization which a creditor can use in the event of a default (or the large dollar amount equivalent of such an arrangement called a "letter of credit"), in which the line between what constitutes collateral and what constitutes a guarantee can be blurred.
I find the &quot;is collapsing&quot; statement troubling. Companies grow, shrink, and restructure all the time. Nelnet might be coming apart, or somebody might be trying to generate clicks for a news story. The normal situation, when a company goes into bankrupcty proceedings, is that a trustee tries to recover as much of the assets as possible to pay out creditors. This would suggest an increased, not decreased, attempt to collect repayments.
Ultimately, if they force you into bankruptcy, everything, except: tools of your trade household items (clothing, furniture), however, if these are worth significantly more than a replacement then they can be sold and you get given a replacement. Short of this they can: garnishee bank accounts garnishee wages and other income seize and sell personal property acquire liens over real property The cannot force you to borrow money pay them, however, this may be a better option than any of the above, particularly bankruptcy. If you are in such a situation you should seek advice on how to best deal with it. Most creditors are willing to negotiate over amounts and timing: something latter on is better than nothing ever.
Let me start by saying that real estate contracts are some of the most heavily regulated contracts and details vary enormously by jurisdiction. That said ... To vary a contract, the contract must actually contain provisions that allow for it to be varied and variations must be in accordance with those. These sorts of clauses are common in long-term contracts (building, mining, logistics etc) but are less common (but not unknown) in transactional contracts like real estate sales. If the contract does not contain such provisions then it can only be varied by a collateral contract which has the same basic requirements of any contract - in this particular case, were you offered something in return for agreeing to delay settlement? If you weren't you do not have a collateral contract that varies the original contract. Notwithstanding, even though the other party delaying settlement from the 11th to the 18th is a breach of the contract by them, by agreeing to it you would be prevented from enforcing your rights under the contract by the doctrine of promissory estoppel. This presumes that they actually settle by the 18th - if they don't all bets are off and you can enforce the rights you have from their breach by failing to settle on or before the 11th - just don't agree to any more extensions. What you remedies are will be detailed in the contract. These would normally include issuing a notice for them to settle by a given date - if they don't do that you can terminate the contract and keep the deposit. You could also sue for damages. Don't do any of this (or anything else) without getting legal advice first. Edit The OP has put in a comment a rather vital piece of information: there is a clause making settlement contingent on the buyer selling their condo. If the delay is in accordance with that clause then the vendor is stuck, even if settlement takes 10 years.
Short Answer The question of whether a real property mortgage is recourse or non-recourse is governed by the law of the jurisdiction where the real property is located. The place where the parties to the agreement reside, or where the documents are signed, is irrelevant. I am not aware of any exceptions to this rule anywhere in the world. In some circumstances, the parties may reach an agreement regarding whether a real property mortgage is recourse or non-recourse if the law of the jurisdiction permits agreements of this type. But, often the parties are not allowed to vary this aspect of their real property mortgage agreement by contract. Choice is law for loans secured by collateral which is property other than real property is pretty much irrelevant in the U.S. This because the law is the same in every U.S. state, territory, or district. Long Answer Background regarding recourse and non-recourse loans To clarify, the terms &quot;recourse&quot; and &quot;non-recourse&quot; are normally used to refer to the remedies available in the event of foreclosure of a loan secured by property that serves as collateral for the loan. When the collateral is real property, the core documents in the transaction are a promissory note that represents a borrower's promise to reply the funds borrowed from any assets available to the borrower that is not exempt from creditor's claims, and a document representing the fact that the collateral may be seized if the promissory note is not paid as agreed, and that the creditor's interest in that collateral has priority over all third parties seeking to collect their debts out of that property which cannot be erased by transferring the property to someone else. This document is sometimes called a mortgage, and a substantially equivalent document used mostly in the Western U.S. is called a deed of trust. I will call this document a mortgage for simplicity, whatever its true name in your locality. In the case of a recourse mortgage, if the borrower defaults, the lender can foreclose on the mortgage, which results in a foreclosure sale at which the lender can bid all or part of the debt secured by the collateral together with any additional cash desired, and their parties may make cash bids. Ignoring for the moment the complications involved when there are multiple mortgages and liens with different priorities encumbering the real property, the person who makes the highest bid at the foreclosure sale is given ownership of the real property in exchange for paying the price bid at the foreclosure sale either in cash (in the case of a third-party bid) or in the from of a reduction in the debt owed, in the case of a lender bidding the debt owed against the property. If the mortgage is a recourse mortgage, then if the lender bids less than the full amount of the debt owed on the promissory note and is the highest bidder at the foreclosure sale, then the debt owed on the promissory note is reduced by the amount of the bid made by the lender and the remainder of the balance owing on the promissory note is a personal debt owed by the borrower to the lender called a deficiency judgment. For example, suppose that you buy a house for $1,000,000 with a $200,000 down payment and an $800,0000 recourse mortgage loan. Some time later, the balance owed on the mortgage loan from regular monthly principal and interest payments is $775,000. But, due to a collapse in the real estate market in the real estate market where your house is located, your house, which had a fair market value of $1,000,000 when you bought it, now has a fair market value of $725,000. You lose you job due to the same economic downturn that has caused the market value of your house to decline and are unable to make mortgage payments. The lender forecloses on your house and bids $725,000 at the foreclosure sale, even though you still owe $775,000 on the promissory note. After the foreclosure sale is completely, the lender owns your house, and you still owe the lender a deficiency judgment of $50,000. The lender may now collect the $50,000 deficiency judgment in much the ame way that the lender would collect a judgment entered by a court on an unpaid credit card bill for $50,000. The lender can garnish your wages (once you get some), can seize your bank accounts, and can seize other property which you own which is not protected by a statutory exemption from creditors. In a recourse mortgage the economic risk of declining property values that wipe out the down payment equity is born by the borrower. In contrast, if you had a non-recourse mortgage, the lender's sole remedy would be to seize the collateral and the lenders would not be able to obtain a deficiency judgment no matter how little your house was worth. Operationally, this means that the lender is required to bid the full amount of the debt owed by the borrower to the lender at the foreclosure sale, even if the property is worth much less than the amount of the debt owed. In the case of a non-recourse mortgage the economic risk of declining property values that wipe out the down payment equity is born by the lender. Choice of Law For Real Property The place where the documents are signed and the domiciles or place of organization of the parties to the agreement are irrelevant to the question of whether a real property mortgage is recourse or non-recourse. In the U.S. (and everywhere else that I am aware of), the law governing security interests in real property, such as mortgages and deeds of trust and liens is the law of the place where the real property is located. So, if you take out a mortgage on property in a non-recourse state, the mortgage will be a non-recourse mortgage. Usually, in a non-recourse state, it is not possible for a lender and a borrower to mutually agree to make the mortgage a recourse mortgage when the default rule is that mortgages are non-recourse mortgages. In contrast, if you take out a mortgage on property in a recourse state, the mortgage will be a recourse mortgage, unless the borrower and lender expressly waive the right of the lender to obtain a deficiency judgment in a foreclosure within the mortgage document. Choice of Law For Other Property The law governing security interests in property other than real property in the U.S. is usually the Uniform Commercial Code which contains choice of law rules. While, in theory, different rules that states could adopt regarding whether security interests in property other than real property are recourse or non-recourse, in practice, every U.S. state has adopted the Uniform Commercial Code as a matter of state or territorial or district law, and at the level of generality of whether a security interest (which is the legal name for a mortgage with collateral other than real property under the Uniform Commercial Code) is recourse or non-recourse, the law is uniform throughout the United States, although there might be slight technical differences between the laws of different states or other jurisdictions within the U.S. based upon the version of the Uniform Commercial Code that is on the books or the decision of state legislators to deviate from the uniform statute's language. The Uniform Commercial Code of each state contains choice of law rules determine which state's version of the Uniform Commercial Code applies to a case. And, the choice of law rules of the Uniform Commercial Code in the state where a lawsuit pertaining to the personal property security interest is what a court in that state applies to resolve the choice of law question. These rules are generally consistent with each other. Footnote on Macroeconomic Implications Of Recourse v. Nonrecourse Mortgages The incentives of lenders and borrowers when entering into mortgage loan arrangements is different in recourse and nonrecourse mortgages, particularly, when the decision to give a borrower a loan is made by a third-party mortgage broker subject to bureaucratic conditions, or by a low level bank employee who acts in the same way, rather than by someone with an economic stake the financial well being of the lender. When mortgage loans are non-recourse, down payments are small, and housing prices are rising, and may be entering a real estate bubble, a borrower is in a &quot;heads I win, tails you lose&quot; situation. If real property values collapse, the borrow loses only his small down payment. If real property values go up, the borrower can sell the property and pocket all of the profits (in some circumstances the profits are even tax free). The borrower has little incentive to worry about the possibility that the fair market value of the real estate could collapse at some point. But, if the decision to allow the borrower to borrow is made by an employee or broker with nothing to lose if a loan is authorized when it shouldn't have been because the risk that the property values will collapse due to a real estate bubble are too great, the mortgage broker has an incentive to be lax in underwriting the loan to make sure that the borrower can really make the payments and that a foreclosure of the loan will realize enough value to pay of the loan if a real estate price bubble collapses. And, since the bank can get its money back and more by foreclosing if the borrower doesn't make payments while prices are going up, there isn't much of an incentive to make sure that the evidence of the borrower's ability to make the payments on the mortgage is accurate. The incentive of the broker or employee is usually to get as many mortgages processed as possible, even if that means overlooking problems with paperwork in a loan application, or using an appraiser who will say that the property being financed is worth what is necessary to get the loan approved, even if you know that the appraiser is cutting corners or just making up inaccurate values to get what the broker wants done. These events can conspire to make a real estate mortgage very bad and to expose the entire community of lenders who make loans in a non-recourse state to catastrophic losses in the event that a real estate bubble collapses. In contrast, this is much less likely to happen in a recourse mortgage state, where the risk of a downside loss deficiency judgment discourages borrowers from trying to finance the purchase of a house that could easily lose more value than the down payment if it was apparent that a real estate bubble was developing. So borrowers would self-police. The reason for this extended footnote and story is that this was one of the root causes of the financial crisis. A handful of states with big real estate markets and non-recourse mortgages (California, Florida and Texas mostly) started to experience real estate bubbles and mortgage lenders, because they had bad incentives in their mortgage origination systems didn't do enough to prevent themselves from financing the purchases of overprices houses. Eventually, the real estate bubble collapsed, lots of borrowers with overpriced houses and little money down defaulted on very large mortgage loans, and the lenders took huge losses on their real estate mortgage portfolios which were supposed to be ultra-low risk but weren't because the people evaluating the real estate mortgage investments overlooked or willfully ignored the risks. This, in turn, resulted in losses so great at the financial institution level that almost every major investment bank in the country and almost every subprime lender in the country went out of business or went bankrupt, and the collapse of this part of the financial industry, in turn, wrecked havoc on every firm in the economy that relied of these financial institutions as a source of investment or a source of financing for their unrelated businesses. The result was the worst recession since the Great Depression.
In business dealings, you would have a contract with a company, not with its owner. The new owner inherits both the assets and liabilities of the company. It's up to the buyer of the business to do due diligence before buying the company. The old owner may escape obligations to clients and suppliers once the sale of the business is complete, but the new owner could sue the old owner for fraud. (It may be possible to escape some liabilities by declaring bankruptcy, but that's not the situation you described. One unethical accounting trick that a company can use is to split the company into two corporations such that one branch inherits the liabilities, and it go defunct.)
It depends How good is your (legal) English? For example, do you know the legal difference between "will", "shall" and "must"? Or, the difference between "employee", "subcontractor" and "worker"? Or the difference between "bankruptcy", "insolvency" and an "act of bankruptcy"? Contingency What are you going to put in your dispute resolution clause? Do you prefer mediation, arbitration or litigation? Will it be a one size fits all or will it be escalating? What happens if one of you dies? Or emigrates? Or divorces? Or is convicted of a crime? A financial crime? A violent crime? A sexual crime? Or what if such is just alleged but not proven? What happens if the company ceases to exist? Or is sued? Or is acquired by someone else? Or by one of you? Who is responsible for insuring the subject matter of the contract (if anyone)? To what value? If the person who should doesn't can the other person effect the insurance and claim the premium as a debt due and payable? Not all of these will be relevant to your contract. Familiarity How familiar are you with this sort of contract? Is this something you do all the time or is this a one off? For example, I am happy to enter a construction contract without legal advice because that's my business and has been for many years - I know my risks and how to manage them, inside and outside the contract. However, when I set up shareholder's agreements, wills and business continuation insurance with my partners, we went to a lawyer. What is your relationship with the other person i.e. how much do you know and trust them? Stakes If the contract is not very important (which is something that varies with the participants, for some people a million dollar contract is not important for others a $5 one is), so that if, by screwing up, you are OK if you lose everything you've staked then write it yourself. Alternatively, if the contract is vitally important to you and your heirs and assignees unto the 6th generation, I'd get a lawyer to write it - its pretty cheap insurance. How long the contract lasts will be a factor in this - a contract that exposes you to risk for 3 months is different than one that does so for 25 years. Basically, its a risk reward calculation. TL;DR Contracts only matter when relationships break down. If you reach for the contract then you can expect that the other party will be playing for keeps and that contract is your only defense against the worst they can do. If you are happy with your skills in mitigating against a cashed-up opponent who wants to see you go down no matter the cost then draft it yourself.
No, because you are affecting the car's value by selling its parts. The car is collateral to the loan, so if you don't make the payments, the lender has the right to repossess and resell it to recoup their money. If they are unable to recover at least the outstanding balance of the loan through resale, you will be on the hook for the difference. This is called a "deficiency balance". Simply having possession of something isn't adequate basis to decide you can do whatever you want with it. You have physical possession, but the lender is the first lien holder on the title until the loan is satisfied.