Chapter 15: Creditor - Debtor Relations and Bankruptcy Copyright 2009 South-Western Legal Studies in Business, a Copyright part of South-Western 2009 South-Western Cengage Legal Learning. Studies Business, a part of South-Western Cengage Learning.
1: Laws Assisting Creditors Liens: Consensual. Statutory. Judicial. Other Remedies: composition agreements, ABC s. Suretyship. 2
Liens Consensual Liens. Personal property as collateral (UCC Art. 9 UCC Secured Transactions). Real property as collateral (Mortgage). Mechanic s Lien: Non-possessory lien on real estate for labor/services. 3
Liens and Attachments Lien: Possessory lien on personal property for labor done to property. Lien: Possessory lien on baggage for unpaid hotel charges. Liens: Court-ordered seizure/sale of property. Writ of : court-ordered seizure of property to secure a judgment. Writ of : orders sheriff to seize nonexempt property within the court s jurisdiction. 4
Garnishment Permits a creditor to collect a debt by seizing property of the debtor held by a third party (garnishee). Proceedings governed by state law (Texas does not permit garnishment except for child support). Laws Limit Amount of Wages. Case 15.1 Indiana Surgical Specialists v. Griffin (2007). 5
Creditors Composition Agreements Creditors contract with the debtor for discharge of the debtor s liquidated debts (fixed amount). Usually enforceable, unless there is duress. 6
Mortgage Foreclosure Mortgagor (Debtor-Borrower). Mortgagee (Creditor-Lender). Debtor Defaults: Foreclosure - go through court to have sheriff seize, advertise, and sell property. 7
Mortgage Foreclosure Money goes to expenses of sale, creditors in descending order of priority, then debtor if any left. If there is still money owed to creditor after foreclosure there is a deficiency, and the debtor is still liable for this. Equity of redemption within statutory period of redemption by the debtor. 8
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2: Suretyship and Guaranty Principal Debtor Surety / Guarantor Creditor Promise by a person (Surety/ Guarantor) to pay the Creditor a debt by Debtor in the event the Debtor does not pay. 10
Suretyship and Guaranty Parties 11
Suretyship Express contract between the surety and the creditor. Creditor can demand payment from surety at any time after debt is due. Creditor need not exhaust all legal remedies against the debtor before holding the surety responsible. 12
Guaranty Secondarily liable, debtor must default, creditor has attempted to collect from the debtor. Statute of Frauds requires guaranty to be in writing. Suretyship vs. Guaranty. Surety is primarily liable for debtor s obligation. Guarantor is secondarily liable. 13
Defenses of Surety & Guarantor Surety can use any of the Debtor s defenses EXCEPT incapacity, bankruptcy, or statute of limitations. Surety can use his own defenses, EXCEPT fraud between Debtor and Surety that is unknown by creditor. 14
Defenses of Surety & Guarantor Material contract modification between Debtor and Creditor will release a gratuitous surety and a compensated surety to the extent he suffers a loss. Surrender or impairment of the Debtor s collateral releases surety to the extent he is damaged. Release of a co-surety releases surety to the extent he is damaged. 15
Rights of Surety & Guarantor Right of Subrogation. Right of Reimbursement. Right of Contribution from Co-sureties. Sureties in equal amounts. Sureties in equal amounts, one or more cosureties missing or insolvent. 16
3: Protection for Debtors Exemptions (Federal and State). Homestead exemption for real property/home. Personal property: some household furniture, clothing, vehicle, some animals, business equipment (see page 370). 17
4: Bankruptcy and Reorganization Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. Secured vs. Unsecured Creditors. Secured: holds a security interest in property that serves as collateral for debt. Unsecured does not have a security interest in collateral. 18
Types of Bankruptcy Relief Bankruptcy code has 8 chapters. 1,3, 5 - general definitional provisions and provisions covering administration, creditors, debtor and estate. Chapter 7 - liquidation proceedings. Chapter 9 - adjustment of debts of a municipality. 19
Types of Bankruptcy Relief Chapter 11 reorganizations. Chapter 12 - adjustment of debts of family farmers with regular incomes. Chapter 13 - adjustment of debts of individuals with regular incomes. 20
5: Liquidation Proceedings (Chapter 7) Chapter 7: or bankruptcy. All assets are turned over to a. Trustee sells nonexempt property and distributes the proceeds to the. Remaining debts are. 21
Liquidation Available for any person, individual, corporation, partnership. Railroads, insurance companies, banks, savings and loan and investment companies licensed by the SBA, and credit unions cannot be debtors. 22
Filing the Petition Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court. Voluntary vs. Involuntary bankruptcy. 23
Voluntary Bankruptcy Under the Bankruptcy Reform Act 2005, Petitioner must certify credit counseling within previous 180 days before filing. Chapter 7 Schedules and Statements. Additional Information: Tax returns each year the case is pending. Perhaps photo documentation. 24
Substantial Abuse Bankruptcy Reform Act of 2005 changed presumptions of abuse. Abuse will be presumed when: Debtor s income is greater than median family income of state in which petition is filed. Abuse will NOT be presumed when debtor s income is below median family income. Case 15.2 Hebbring v. U.S. Trustee (2006). 25
Voluntary Bankruptcy Court issues order of relief. Clerk of court gives trustee and Creditors mailed notice of the order within 20 days. 26
Involuntary Bankruptcy Creditors force Debtor into bankruptcy proceedings. (Not against a farmer, charitable institution). If there are 12 or more creditors, need three or more with unsecured claims totaling at least $13,475 to join in petition. 27
Involuntary Bankruptcy If there are less than 12 creditors, one or more having a claim of $13,475 may file. Court will order relief if Debtor is generally not paying debts as they come due. 28
Involuntary Bankruptcy Court will order relief if: A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of debtor s property within 120 days before filing. Penalties for frivolous petitions against debtors, including Punitive damages. 29
Automatic Stay Either voluntary or involuntary. Creditors cannot commence or continue most legal actions. Damages for violation of stay. Creditors can get adequate protection. Periodic or one time cash payments or indubitable equivalent. 30
Automatic Stay Exceptions: 2005 Bankruptcy Reform Act exempts domesticsupport obligations, child custody, and security issues. Limitations: Stay terminates 60 days unless extension. Stay terminates 30 days on securities. 31
Property of the Estate Debtor s Estate includes: All Debtor s legal and equitable interests in property presently held, including community property; Property transferred in a voidable transaction; and Property which Debtor becomes entitled within 180 days after filing. 32
Property of the Estate Estate includes (cont d): Proceeds and profits from the property of the estate. After-acquired property such as inheritances, property settlements, and life insurance death proceeds. 33
Creditor s Meeting and Claims Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets. Within 90 days, Creditors must file proof of claim with court clerk. Leases cannot be for more than one year. 34
Creditor s Meeting and Claims Allowed unless disputed. If claim is disputed or unliquidated, court will decide value. It is a crime to file false claim. Employment contracts and real estate. 35
Exemptions See list, pages 376-377. HOMESTEAD Exemption. States may pass law requiring Debtor use state exemptions. In some states, Debtor may choose state or federal exemptions. 36
The Trustee Court-appointed until first meeting of creditors. Creditors elect permanent trustee Administers estate. Collects proceeds, liquidates assets and pay Creditors in order of priority. 37
Avoidance Powers Trustee has powers to avoid (set aside) sale or transfer of debtor s property, and take it back. Voidable Rights Preferences 38
Voidable Rights Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent. 39
Preferences A Debtor is not permitted to transfer property or make a payment that favors or gives a preference to one creditor over another. For a Trustee to recover preferential payment, Debtor must be insolvent and transferred property for pre-existing debt within previous 90 days. 40
Preferences Trustee can use preferential payment to pay a real preexisting debt, not for current consideration. Creditor gets more than he would in a Chapter 7. Consumer can now transfer up to $5000 to creditor without constituting a preference (2005 Act). 41
Liens on Debtor s Property Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent. Can avoid liens which were unperfected on date of bankruptcy. 42
Fraudulent Transfers Trustee may avoid fraudulent transfers made within one year of filing of petition. Trustee may proceed under state law for fraud with a 3 year statute of limitations. 43
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Distribution of Property If Secured property: Consumer debtors. Have 30 days from filing petition or before first meeting of creditors. Debtor must tell what she intends to do with collateral- - keep or surrender. Trustee must enforce within 45 days. If surrenders: creditor can keep or sell. If creditor keeps = full satisfaction of debt. If creditor sells = can use extra for costs, or can become unsecured creditor for deficiency. 45
Distribution of Property Unsecured property Paid according to bankruptcy law. All of one class must be paid before moving to next. Creditor within last class receive proportionately if not enough. See Priority List in text. All creditors paid, trustee gives extra back to debtor. 46
Discharge Exceptions to Discharge Objections to Discharge Revocation of Discharge Reaffirmation of a Debt 47
Exceptions to Discharge Claims for back taxes. Claims for amounts borrowed by Debtor to pay federal taxes. Claims against property/money obtained by Debtor under false pretenses. Claims by Creditors who did not know about bankruptcy. Case 15.3 In Re Mosley (2007). 48
Reaffirmation of Debt Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy. Agreement is filed with court. Debtor can rescind agreement at any time. 49
6: Chapter 11 Reorganizations Chapter 11 Corporations. Debtor and Creditors formulate a under which the Debtor pays a of its debts and is of the rest. Same as are eligible under Chapter. 50
Reorganizations Fast tract Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate. Workouts. 51
Reorganizations Debtor in Possession (DIP). Trustee may be appointed. DIP has same powers as trustee in Chapter 7. Strong-arm clause. Collective Bargaining Agreements. Creditors Committees. 52
The Reorganization Plan Filing the Plan. Within 120 days after date relief order. Plan must be equitable. Acceptance and Confirmation of the Plan. Discharge. 53
7: Bankruptcy Relief under Chapters 13 and 12 Chapter 13: Individuals Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$336,900 or fixed secured debts of <$1,010,650. Filing the Petition. Case 15.4 In re Buis (2006). The Repayment Plan. Only filed debtor. Time allowed for Repayment. After 2005, depends on debtor s income. Confirmation, Objections, and Modifications. 54
Chapter 13 Discharge 2005 Bankruptcy Reform Act deleted many of the super discharge provisions. Excludes: Fraudulent Tax Obligations. Criminal Fines and Restitution. Fraud by a Fiduciary. Restitution for Willfully Causing Personal Injury or Death. 55
Chapter 12: Family Farmers and Fisherman Family farmer : 50% income from farming, and debts are at least 50% farm related. Total Debt must not exceed $3,544,525. Family Fisherman : 50% of income from commercial fishing operations. Filing the Petition. Content and Confirmation of the Plan. 56