Debts come in a lot of types and varieties. Two main categories of debt are called secured and unsecured debt. The difference between the two is important when you are facing debt collection actions, and you need to know your rights and responsibilities. Anytime you have debt issues that you're struggling with, an experienced debt resolution lawyer can help guide you through the process to get the best result.
Secured Versus Unsecured Debt
The basic difference between the two types of debt is that secured debt has some collateral—like real estate or an item of value—attached to the loan agreement, and unsecured debt doesn't have any collateral connected to the loan. Collateral can take many forms, from stocks and bonds to expensive artwork or jewelry to business equipment or inventory. The most typical secured debt involves automobile loans and home mortgages, in which the debt is connected to the thing bought with credit: the car or home.
If there is a problem with payment and the loan goes into default, a secured creditor can take possession of the collateral and use it to satisfy the loan. Your car can be repossessed and sold if you don't pay your auto loan, your home can be foreclosed on, and the money from a sale can be used to pay the loan off. An unsecured creditor doesn't have the option of seizing your property when the loan isn't paid, though. This is part of the reason that unsecured credit is usually more costly, with higher interest rates than secured debt.
What Is Subrogation?
Subrogation is a legal doctrine that allows for the substitution of one party in place of another in regard to a claim or a legal right to make a claim. So, when a company steps in and pays a debt that is owed by someone else, they have the right to make all the legal claims that the original creditor had against the debtor. Subrogation doesn't happen automatically and isn't available in every case; instead, it is a legal principle based on fairness, called "equity" in the law.
Subrogation claims are common in the context of auto insurance and health insurance claims. If an insurance company pays some bills for someone who was injured in a car crash, but the other party was at fault for the collision, the insurance company can then work to collect the money they've paid back from that other party or their insurance company. Similarly, suppose your health insurance paid claims for injuries that were caused by someone else's negligence. In that case, they will typically have a subrogation claim against the person responsible for the injuries.
Under California law, a few legal requirements must be met before a party can make a subrogation claim. The prerequisites to a subrogation claim include:
- The payment was made to protect the interests of the party seeking subrogation, like your insurance company. They had a duty under your insurance policy to ensure that your medical bills were paid as needed, so they were protecting their own interests in fulfilling the contract and paying the bills.
- The payment wasn't volunteered, for example, as a gift, but was authorized by contract or required of the party who made the payment.
- The bills that the party claiming subrogation paid were not the primary responsibility of that party but were the true responsibility of someone else.
- The payment satisfied the full debt for which they are claiming subrogation.
- The subrogation claim may not cause injustice to any other legal rights of another party.
Old Debt May Not Be Collectible
Some debts have gone on long enough that the law won't allow the creditor to go to court to force you to pay. The statute of limitations is a law that limits how long a creditor has to file a lawsuit on the debt. Generally, California has a four-year statute of limitations on debts based on a written instrument like a typical loan contract. After four years from the date of signing the contract have passed, the creditor can't usually go to court to collect the debt unless an exception applies. You have the same defenses against a subrogated party trying to collect a debt from you as you had against the original creditor. So, if the statute of limitations has expired, the new creditor can't take you to court any more than the original creditor could.
What Are My Defenses?
If you are a debtor who now owes money to a different party than you thought you owed it to, you may have defenses against the subrogation claim. Some arguments against being liable for the debt include:
- Statute of limitations: when the time has run out for the original creditor to enforce the debt, the party who is subrogated to the claim has also lost the right to take the claim to court
- Failure to follow the equitable principles of subrogation: as discussed above, a party that claims a subrogation interest in a debt that you may owe has a lot of boxes to check to prove that they have taken over the debt in a proper and legal manner. If they've failed to satisfy all the legal elements of a subrogation claim under California law, you may have a valid defense to having to pay the debt to them.
- Defenses you had against the original creditor: If you had good legal arguments why you didn't owe some or all of the debt to the original creditor, you are entitled to raise those defenses against the party that claims a subrogation interest in the original debt
Subrogation claims can be complicated, as they involve a party who has "stepped into the shoes" of your original creditor, and they must do so in accordance with the law. As an unsecured debt, you can assert certain defenses against a collection action, but you need to understand the complexities of the law to start. A seasoned legal advisor can help you sort out your responsibilities and take the right actions to protect your interests.
Get Legal Help
The legal experts at Fitzgerald & Campbell, APLC have been helping Californians resolve debt problems since 1992. Our work on behalf of our clients has saved millions of dollars of debt. Our team of compassionate problem-solvers understands that debt challenges can feel overwhelming and stressful. Our focus is exclusively on consumer and small business debt issues, so you can be assured that we are totally on your side from the start. We are eager to apply our extensive legal knowledge and skills to represent you as you work to get your finances stable. Reach out to speak to an attorney today to see how we may be able to help you eliminate your unsecured debts. Call us at (844) 431-3851 or contact us online.