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You are asking . . .

Q. What is the basic difference between a guaranty of payment and one of collection?

A. The courts distinguish a "guaranty of payment" as opposed to a "guaranty of collection." The basic difference between a guaranty of payment and a guaranty of collection is that in a guaranty of payment, the guarantor undertakes unconditionally that the borrower will pay, and the lender may, upon default, proceed directly against the guarantor without taking any step to collect the debt from principal. With a guaranty of collection, there is some condition precedent to the liability of the guarantor. Typically, the condition is that if the debt cannot be collected by legal proceedings, the guarantor will pay, and so legal action against the principal and a failure to collect from him through foreclosure are conditions precedent to the liability of the guarantor. A guarantor of payment is liable to the guarantee immediately upon the default of the principal and without a demand or notice.

Q. If we should use this particular item as collateral for a loan, how is a security interest in life insurance proceeds perfected in North Dakota?

A. N.D.C.C. § 26.1-33-33 provides that a life insurance policy may be assigned to any person, and that person may recover upon the policy in accordance with the terms of the policy. N.D.C.C. § 41-09-04(7) (U.C.C. § 9-104) excludes the application of the Uniform Commercial Code to the transfer of an interest in an insurance policy, meaning that a lender cannot simply file a U.C.C. - 1 to perfect that security interest. The security interest in an insurance policy may only be "perfected" by obtaining the acknowledgment of the insurer to the assignment. We recommend that before attempting to use proceeds in a life insurance policy as collateral, the creditor should first establish that the policy has not been canceled, and then verify that no prior assignments of the policy are on record with the insurer.