Credit FAQ

What is Credit?

From a legal perspective, credit could be described as a form of debt. Credit law has a broad range of applications, from loans and promissory notes to collections issues. A promissory note, which is an acknowledgement that a debt exists as well as a statement to how the debt will be paid off, would fall under the legal umbrella of “credit” issues. Many types of borrowing and lending could also be categorized under this same umbrella.

Lines of credit, specifically, refer to types of loans in which the money being borrowed is freely available to the borrower; a “credit limit,” for example, would represent the maximum amount that can be borrowed under a line of credit. While lines of credit are a part of credit law, not all credit law is aimed at regulating this specific type of interaction.

What is the difference between Credit and Debt?

Credit and debt are similar concepts, which is why subtle distinctions must be made in order to fully understand credit from a legal perspective. Essentially, the difference between debt and credit could be likened to the difference between a credit card and a debit card. Debt is used to make purchases – for example, a mortgage is a type of debt and not really a type of credit. Credit, meanwhile, is an amount of money that can be used and turned into debt – for example, a line of credit on a credit card might max out at $10,000, but if only $1,000 in purchases were made, then only $1,000 of debt has been accrued.

Of course, from a legal standpoint, this is a simplified analogy. But the analogy serves to help understand the difference between a bank extending credit and a bank making a direct loan for a purchase.

What is a Promissory Note?

A Promissory Note is an acknowledgment that a debt exists as well as a signed plan to pay off that debt – usually either in balloon payments or installments. Promissory Notes fall under the umbrella of credit law because they can be ways of extending credit to a borrower, even if the credit does not go towards debt on a specific purchase (in which case the transaction would more likely resemble a loan).

Many people confuse Promissory Notes with IOUs – the difference is that a Promissory Note also includes a payment promise while an IOU is merely an acknowledgement of the existence of some sort of debt.

How can credit be paid off?

As researching into the use of Promissory Notes might show you, it is possible to pay off credit in a number of ways. There is a one-time balloon payment to end the credit account, for example. There are also monthly installments linked to the use of credit. Additionally, payment can be “on demand” by the lender, though these terms can be a little harsh for the borrower if they are unable to make payment at any given moment.

What happens when credit is not paid off?

When someone does not pay the debts they incur as the result of credit, typically there is an initial late fee that might include a notification. If the payment is continually late, there’s a chance the credit account may go into collections. In this case, the person or company issuing the credit may send Collection of Payment Letters in order to ensure that the borrower is aware of the late payment. Depending on the initial terms of the credit agreement, it may then be possible to take further action to ensure that payment on credit is collected.

What is a Release of Security and what does it have to do with credit?

A Release of Security takes place when secured debt exists – secured debt referring to debt that is backed by some sort of property to “secure” the lender’s investment. A Release of Security, therefore, occurs when the lender then releases this security and no longer has any claims to the property in question.

Can businesses, like individuals, receive credit from a lender?

Yes, just as businesses can receive loans from lenders. This will typically entail a credit application to the lender in question as well as a detailed plan for how the credit will be repaid – and possible how the credit will be used. Keep in mind, however, that simply because individuals and businesses alike can receive credit does not mean that the same forms can be used to secure both. Instead, you’ll want to use the forms and applications best suited to your situation.

What is a Subordination Agreement?

This is an agreement between a debtor, a creditor, and a “subordinator” who is also a part of the process as a creditor. In this agreement, the subordinator in question agrees that another creditor will have priority as it relates to secured assets on the loan. Put simply, a Subordination Agreement determines which creditor has “priority” over a certain piece of property used to secure a loan or line of credit. These agreements can get a little complicated simply due to their nature; however, they can be quite useful in sorting out exactly how a loan is to play out if a debtor is not able to make payments and there is more than one creditor on the account.

As a debtor, how can I acquire protection for myself?

Once an agreement to pay off debts is made, the protections that you have rest in two places: already-existing laws in your state as well as the agreement you originally signed with your creditor. However, it’s important to remember that other agreements – such as amendments – can be signed to modify an agreement in order to provide you with more protection. These agreements, of course, require the consent of both parties involved.

As a creditor, how can I ensure protection of the loan?

This is usually handled through the securing of debt – i.e., the debtor puts up a piece of property to secure the loan. This is quite common in all manner of credit and debt agreements.