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Unformatted text preview: C HAPTER 26 T HE L EGAL A SPECTS OF C REDIT Objectives After studying this chapter, you should have an understanding of: the legal significance of credit transactions in business the difference between secured and unsecured creditors the ways that lenders and borrowers are protected the implications of guaranteeing a debt Learning Outcomes Recognize the significance of the difference between a secured and an unsecured creditor (page 640) Recognize the right of the secured creditor to seize and sell property used as security for a loan (page 641) Understand how provincial governments regulate the credit transaction to protect the consumer (page 642) Understand what assets are covered under a general security agreement (page 647) Understand how personal property security arrangements establish priority among creditors (page 649) Understand the lenders remedies on default and the limits on lenders remedies (page 650) Understand the borrowers remedies on default (page 652) Understand the ramifications of giving a personal guarantee (page 653) Chapter Summary The debtor-creditor relationship is established by the contract that sets out the rights and liabilities of both parties. Creditors are either secured or unsecured. The rights of an unsecured creditor are not as good as those who are secured. By legislation, a secured creditor can register the security and then claim priority over other creditors, should the debtor default on payment. The secured creditor has the right to seize and sell the property used as security on the loan. The unsecured creditor only has the right to payment after the secured creditors have claimed the assets covered by their registered agreements. In addition to demanding security, as further protection against the risk of nonpayment, a creditor may also demand a personal guarantee before advancing credit. This is a promise by a third party to pay the loan on behalf of the debtor, should the debtor default. The contract of guarantee places assets of the guarantor at risk, not only for the amount owing at the time the guarantee is signed, but on all credit extended to the debtor while the guarantee is in force. Almost all businesses need to borrow to finance their operations, and need to extend credit to customers to close deals. Therefore, most businesses are both debtors and creditors. All contracts surrounding the credit arrangements should be examined and understood thoroughly, so that the business understands its position as both a creditor and debtor. 2008 BY NELSON, A DIVISION OF THOMSON CANADA LTD. PART 8: FINANCING THE BUSINESS Study Outline Use this outline to prepare a complete set of notes for this chapter....
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