Rights of a Surety Against the Creditor

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A surety is often used when a person requires a bond, either for court-related matters or as part of a business contract. A surety essentially guarantees another person's debt or obligations. When the person defaults on the debt or obligation, the surety becomes liable to the creditor. While the surety is liable, the extent to which that liability extends is not infinite. A surety has rights against a creditor; however, the precise rights will vary somewhat by state.

Purpose of a Surety

  • A surety is a person who agrees to take on your debt or obligation should the need arise. Two common situations arise wherein a surety is used. The first is when a person is arrested and the court sets a surety bond for his release. In that case, the person may only be released if a surety agrees to become responsible for the person's appearance in court. The other common usage of a surety is in the construction or building industry. A contractor is often required to be "bonded." What that means is that a surety has agreed to guarantee the contractor's work to the property owner and/or payments to subcontractors or suppliers within certain contractual guidelines.

Surety Process

  • When a surety is required, the person requiring the surety bond must apply to the surety. The surety will then conduct an investigation to determine whether the person is credit worthy or will be a good surety risk in the case of a criminal bond. If the surety decides to write the bond, the person requesting the bond must pay a premium for the bond. The cost of the bond will vary greatly depending on the purpose, the information ascertained in the investigation and the state where the surety operates.

Default

  • If the person covered by the surety, or the principal, defaults on the terms of the bond, the surety becomes liable to a creditor. In the case of a criminal bond, this usually means that the surety must either find the defendant and bring her to court, or pay the entire amount of the bond to the court. Default on a contractor bond generally means that the surety becomes liable to a property owner, subcontractor or material supplier. The amount to which the surety is liable will depend on the original terms of the surety, or bond, contract negotiated by the parties.

Surety Rights Against Creditor

  • State law will determine the precise rights that a surety has against a creditor; however, there are common rights and procedures among the states. A surety cannot be held liable for more than the extent of liability contracted for in the original contract. If, for instance, a surety bonds a contractor for up to $100,000 but the contractor ultimately owes the property owner more than that amount, the surety is only potentially liable for $100,000. In addition, a surety generally has the right to require the creditor to seek payment from the principal directly. Although the surety has guaranteed the debt or obligation of the principal, the creditor must still try to obtain payment from the principal before requiring the surety to cover the debt or obligation. The surety is also typically entitled to any security held by a creditor for performance of the principal. If, for example, the creditor is holding machinery of the principal's because payment has not been made and the surety satisfies the debt, the surety is entitled to the machinery in most cases.

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