CPA Regulation (REG) : Surety Agreements

Study concepts, example questions & explanations for CPA Regulation (REG)

varsity tutors app store varsity tutors android store

Example Questions

Example Question #1 : Surety Agreements

Brown cosigned Royal's $50,000 note to State Bank. If Royal is later adjudicated mentally incompetent, what would be Brown's liability on the note?

Possible Answers:

Not liable to pay State unless Brown was a compensated surety.

Not liable to pay State because Royal’s incompetency discharges Royal as a surety.

Liable to pay state only if State first seeks payment from Royal.

Liable to pay State on the due date of the note.

Correct answer:

Not liable to pay State because Royal’s incompetency discharges Royal as a surety.

Explanation:

Any contract made by a party legally deemed incompetent is voidable, and a voided contract would release the liability of all parties involved.

Example Question #2 : Surety Agreements

Which of the following rights does a surety have?

I.   Right to compel the creditor to collect from the principal debtor

II.  Right to compel the creditor to proceed against the principal debtor’s collateral

Possible Answers:

II only

Both I and II

Neither I or II

I only

Correct answer:

Neither I or II

Explanation:

As a rule, a surety generally has no rights to compel the creditor to collect from the principal debtor. Such rights are only available to a guarantor of collectability, who is liable only if the creditor has exhausted all other legal remedies.

Example Question #3 : Surety Agreements

Which of the following events will release a noncompensated surety from liability?

Possible Answers:

Modification by the principal debtor and creditor of their contract that materially increases the surety’s risk of loss.

Filing of an involuntary petition in bankruptcy against the principal debtor.

Release of the principal debtor’s obligation by the creditor but with the reservation of the creditor’s rights against the surety.

Insanity of the principal debtor at the time the contract was entered into with the creditor.

Correct answer:

Modification by the principal debtor and creditor of their contract that materially increases the surety’s risk of loss.

Explanation:

A non-compensated (or gratuitous) surety is bound to the contract if he or she makes a promise to act as a surety prior to consideration changing hands from the creditor to the debtor. A gratuitous surety is released from liability only in a change of the original contract. 

Example Question #4 : Surety Agreements

Per the Federal Fair Debt Collection Practices Act, which of the following would a collection service using improper debt collection practices be subject to?

Possible Answers:

Civil lawsuit for damages for violating the act

Abolishment of the debt

Reduction of debt

Criminal prosecution for violating the debt

Correct answer:

Civil lawsuit for damages for violating the act

Explanation:

The FDCPA gives parties injured by unfair collection practices the right to sue for damages. It does not provide for any of the other answers given.

Example Question #5 : Surety Agreements

Of the following defenses, which would a surety be able to assert successfully to limit the surety’s liability to a creditor?

Possible Answers:

A personal defense the principal debtor has against the creditor

The incapacity of the principal debtor

The incapacity of the surety

A discharge in bankruptcy of the principal debtor

Correct answer:

The incapacity of the surety

Explanation:

A surety may raise his or her own contract defenses to limit his or her liability, thus the surety’s own incapacity is a defense to the surety promise.

Example Question #6 : Surety Agreements

Of the following rights and liabilities, which does a surety have?

Possible Answers:

Liability on debt agreed to backstop

Right to compel the creditor to collect from a principal debtor 

Right to compel the creditor to proceed against the principal debtor’s collateral

Liability on any debt decided by the creditor

Correct answer:

Liability on debt agreed to backstop

Explanation:

A surety does not have the rights listed, as the surety acts to back up the debts of another party. Thus, the surety would have the liability on debt they agreed to backstop.

Learning Tools by Varsity Tutors