Securing and consolidating debts (part two) - types of debt security

In the previous article, we introduced you to the issue of securing and consolidating debts in the Czech legal system in general. In this article, we will focus on the different types of debt security and their advantages and disadvantages. As mentioned in the previous article, within the Czech legal system these institutes can be found in Act No. 89/2012 Coll., the Civil Code, as amended (the "CC"), which regulates the different types of security.

Guarantee

A guarantee is a personal security arrangement that arises from the guarantor’s declaration that they will satisfy the creditor if the debtor fails to fulfill their obligation. The creditor can then directly assert their claim against the guarantor if the debtor defaults. The CC requires the guarantor’s declaration to be in writing. The advantage of a guarantee is its simplicity and speed. It also increases the creditor’s certainty that their claim will be satisfied, as the creditor gains another party from whom they can seek the debt. The disadvantage is that the guarantee is limited to the guarantor's personal assets, which may not cover the entire debt.

Assumption of Debt

A third party becomes a new debtor alongside the original debtor and is jointly and severally liable for the debt. The advantage of the assumption of debt is that the creditor can choose from whom to demand payment, increasing the likelihood of debt repayment. A minor disadvantage is its uncommon nature, as it does not add a new security element but merely increases the number of parties responsible for the debt.

Financial Guarantee

A financial guarantee is created by the guarantor’s declaration in a guarantee document, stating that they will satisfy the creditor up to a certain monetary amount if the debtor fails to fulfill their obligation. This type of security offers a high level of certainty that the claim will be satisfied, as the guarantors are usually banks or other financial institutions. However, the disadvantage of this instrument is its administrative and time demands, which are higher compared to other security instruments.

Transfer of Rights as Security

This type of security involves the temporary transfer of the debtor’s or a third party’s right to the creditor. If the debtor fails to fulfill their obligation, the creditor can retain the transferred right or utilize it. The transfer of rights as security provides a high level of certainty for claim satisfaction and offers flexibility in using various property rights. A downside is the creditor’s obligation to manage the secured property.

Wage Deduction Agreement

A wage deduction agreement allows the creditor to apply deductions from the debtor’s wages or other income. The creditor then receives regular payments (installments). This arrangement also reduces the administrative burden for the creditor, as payments are made directly by the debtor’s employer. However, this type of security can only be used for individuals and requires the employer’s consent.

Lien

A lien secures the creditor’s claim by having the debtor provide a certain asset (e.g., real estate) as collateral. If the debtor fails to fulfill their obligation, the creditor can satisfy the claim from the collateral. This type of security offers a high level of certainty that the claim will be satisfied, either through repayment (the debtor is highly motivated) or, for instance, through the sale of the collateral. An advantage is the possibility of using various types of assets as collateral. However, due to the requirement of a written agreement and often the need to register the lien in public registers, this type of security is more administratively demanding.

Retention Right

A retention right allows the creditor to retain the debtor’s movable property, which the creditor has in their possession, until the debtor fulfills their obligation. This is a quick and effective means of security that does not require complex administrative procedures. The disadvantage is that the retention right applies only to movable property already in the creditor’s possession.

Conclusion

Each type of security has its advantages and disadvantages, which must be considered in the context of the specific case. Combining multiple types of security can increase the creditor’s chances of satisfying their claims.

Do not hesitate to contact us anytime if you need assistance with securing or affirming your claims. We will gladly help and provide comprehensive legal services.

In the following article, we will delve into the various types of debt affirmation and compare their advantages and disadvantages for practical use.

Responsible Lawyer: JUDr. Zuzana Liškařová, co-authored by Denisa Konečná.