Chapters of the article
Who can be a creditor?
The general definition tells us that a creditor is a person against whom the debtor has a claim which he has undertaken to pay according to the terms agreed in advance in the contract.
Under this interpretation, we can easily imagine a situation where a neighbour lends us twenty thousand, a bank gives us a two-million-dollar mortgage to buy a flat, or a business partner has delivered goods, issued an invoice and is waiting to be paid. In all of these situations, we have described what a lender might look like in practice.
A creditor can be a natural or legal person who has the right to demand performance from us as the debtor. The basis is usually a contractual legal relationship, such as a loan agreement, credit agreement, etc. The debtor is obliged to pay the debt. If he fails to do so, the creditor has the right to enforce his claim in court.
Are you trying in vain to recover your debt?
In the case of debt collection by the creditor itself, many debtors, for example, play on existing good (family, friend or business) relationships and believe that they will get away with endlessly repeating their promise to pay. The moment you start communicating with the debtor through a law firm, the helpfulness of the debtor will increase manifold, as will the speed of resolving their obligation. Often there may not even be any court proceedings.
Execution versus insolvency
The position of debtors and creditors is typically discussed in the context of foreclosure and insolvency. These terms are often used interchangeably, both focusing on the recovery of debts, but expressing quite different situations.
Enforcement focuses on the enforcement of a court order. It is most often about paying a debt, but it can also be about eviction, an apology or anything else. Unfortunately, however, some debts are effectively unpayable for the debtor in question and they may spend decades in execution. The foreclosure is used to pay off the entire debt. The application for foreclosure is always filed by the creditor.
In contrast, insolvency is typically a debtor’s move to resolve his extensive debts, even though he does not currently have the means to pay them. The insolvency petition is usually filed by the debtor himself (however, it can also be initiated at the request of the creditor) and after the necessary steps have been taken, insolvency is declared for 3-5 years. During this time, the debtor has to cut back considerably, living only on the minimum necessary. However, after this time he has a chance for a fresh start, even if all his obligations have not been met.
If you are not sure how to resolve your problematic situation, you need to contact an attorney.
Tip: You are in complete control of your financial situation, you are not in debt and if you are, you are paying properly. The insolvency record is therefore something you don’t care about at all. But maybe it should. It is a very practical tool that can be useful to you. In our article, we’ve summarised the reasons why you should be interested in it, what you can find in it and how to search it.
At the same time, the lender is the one who is taking a certain amount of risk and must weigh all the risks when expecting to be paid back, ideally including interest. This means that he must assess the ability of the beneficiary to meet his obligations. The creditor can be a business partner who supplies me with goods, but also an entity that enables the debtor to develop, either personally or in business.
Because of the aforementioned risks that lenders take, we often see lenders requiring certain guarantees or other assurances to help them obtain at least partial compensation if the borrower fails to pay on time.
Creditor protection, secured and unsecured creditor
Asecured creditor is a creditor who has secured his claim by means of an asset or right in the debtor’s property. A typical example is the aforementioned mortgage on real estate. The condition for obtaining a mortgage is the granting of a mortgage over the property. If the debtor is unable to meet his obligations in the long term, the bank may become the owner of the property as a last resort.
Logically, an unsecured creditor is a creditor who does not have his claim secured by one of the above-mentioned forms of security. However, this does not mean that they do not ‘secure’ their obligation in other ways. He can verify the debtor in various ways (in the insolvency register, proof of ownership of real estate, proof of income), another option is to secure the obligation with a guarantor.
The distinction between secured and unsecured creditors is not a mere theory. It is particularly relevant in the context of insolvency and the authorisation of the debtor’s application for debt relief. This is only possible if it appears that the debtor will pay at least 30 % of its unsecured creditors in the arrangement. Otherwise, the application for insolvency would be rejected for lack of assets or income of the debtor and bankruptcy would follow.
Under the Insolvency Act, the security institutions are:
- Contractual lien,
- Restriction of ownership of real estate,
- Transfer of security interest,
- Assignment of claim (cession) – assignment of a claim for the purpose of securing the debtor’s claim,
A common security institution is the contractual lien. The pledge may be not only real estate, but also movable, tangible (automobile) and intangible (trademark) property. It is essential that the pledge can be traded and monetised. The typical use is, of course, through a mortgage.
A lien allows a creditor to retain another’s movable property to satisfy its claim from the proceeds of its sale or other realisation.
Restriction on the ownership of immovable property
This is similar to a lien, it is only used for real estate and is stated on the title deed for the property in question.
Transfer of security interest
This is typically used to secure obligations. Its essence is the transfer of the debtor’s right in favour of the creditor to secure the creditor’s claim. The right transferred must have a property value. It is typically used for leasing contracts and various loans for movable assets.
Assignment of receivables
In an assignment of a claim , there is a change in the creditor’s identity. This is similar to a security assignment, except that the subject of the assignment is the receivable.
Protection of the debtor from creditors
At certain times, the insolvency law takes the side of the debtor and allows him to delay his obligations towards creditors to a certain extent. The aim is not, of course, to worsen the debtor’s solvency or to encourage a lax approach to obligations, but rather to give the debtor more time to raise money and meet its obligations.
The debtor may thus apply for a so-called moratorium. This allows him to delay the declaration of bankruptcy for up to 4 months and thus obtain temporary protection. During this period, the right of creditors to actively participate in the resolution of the debtor’s adverse economic situation is effectively postponed. The debtor is thus able to concentrate on its business activities and try to avert its demise.
However, one of the conditions for its declaration is the consent of a majority of creditors, calculated according to the amount of claims. This majority of creditors is also entitled to petition the court to lift the moratorium at any time.