Liability for Debts
Lesson:
Whenever there is a debt to pay, there are two parties: those who have to pay, and those who expect to be repaid.
While we often use terms like debtor (someone who has to pay) and creditor (someone who is expected to be repaid), there are more nuanced terms that are often used.
Here are some common ones:
- Joint liability - All debtor parties are responsible for the entire debt. Creditors can go after any party for the full amount.
- Several liability - Each debtor is only responsible for his portion of the debt. Creditors can only go after each party for his portion.
- Guarantor - The guarantor is the party who agrees to be responsible for the debt, at a lower priority level than the borrowers. In other words, the borrowers have to fail to pay before the creditor can go after the guarantor.
- Surety - The surety is the party who agrees to be responsible for the debt, at the same priority level as the borrowers. In other words, the creditors do not have to seek repayment from the borrowers before coming after the surety.
- Subrogated liability - The party who pays the debt has the right to pursue recovery from the debtors.
You're an accountant, trying to write a report on a recent problem involving debt
You've been provided with the following information:
- After paying the full loan amount on behalf of his co-signers, one of the borrowers legally stepped into the lender’s position to recover money from the other borrowers.
What is the term for the party described in this situation?
Answer:
- Subrogated liability
Explanation:
-
Subrogated liability - The party who pays the debt has the right to pursue recovery from the debtors.