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Chapter 16: Creditor-Debtor Relations and Bankruptcy - PowerPoint PPT Presentation

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Chapter 16: Creditor-Debtor Relations and Bankruptcy. §1: Laws Assisting Creditors. Liens: Consensual; Statutory; or Judicial. Other Remedies: composition agreements, ABC’s. Suretyship. Liens [1]. Consensual Liens.

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Chapter 16 creditor debtor relations and bankruptcy l.jpg

Chapter 16: Creditor-Debtor Relations and Bankruptcy

1 laws assisting creditors l.jpg
§1: Laws Assisting Creditors

  • Liens:

    • Consensual;

    • Statutory; or

    • Judicial.

  • Other Remedies: composition agreements, ABC’s.

  • Suretyship.

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Liens [1]

  • Consensual Liens.

    • Personal property as collateral (UCC Art. 9 UCC Secured Transactions).

    • Real property as collateral (Mortgage).

  • Statutory Liens.

    • Mechanic’s Lien: Nonpossessory filed lien on real estate for labor/services.

    • Artisans’ Lien: Possessory lien on personal property for labor done to property.

    • Innkeeper’s Lien: Possessory lien on baggage for unpaid hotel charges.

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Liens [2]

  • Judicial Liens: Court-ordered seizure/sale of property.

  • Judicial Liens: Attachments, Writs of Execution, Garnishment:

    • Case 16.1: U.S. v Smith(1995).

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Mortgage Foreclosure[1]

  • Mortgagor (Debtor-Borrower).

  • Mortgagee (Creditor-Lender).

  • Foreclosure: Mortgagor defaults; Mortgagee petitions court to have sheriff seize, advertise, and sell property.

    • Money goes to expenses of sale, creditors in descending order of priority, then debtor if any left.

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Mortgage Foreclosure [2]

  • 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: Mortgagor can “redeem”: the property by paying full amount plus any penalties and taxes.

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§2: Suretyship and Guaranty

When a 3rd party promises to pay a debt owed by a Debtor who doesn’t pay, either a suretyship or guaranty is created.




Surety /


Suretyship l.jpg

  • 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.

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  • Secondarily liable, debtor must default, creditor has attempted to collect from the debtor.

  • Statute of Frauds requires guaranty to be in writing.

    • Case 16.2: Wilson Court Limited Partnership v. Tony Maroni’s (1998).

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Defenses of the Surety & Guarantor [1]

  • 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.

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Defenses of the Surety & Guarantor [2]

  • 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.

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Rights of the 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 co-sureties missing or insolvent.

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§3: Protection for Debtors

  • Exemptions (Federal and State):

    • Homestead; and.

    • Personal property

  • Holder in Due Course does not work against consumers.

  • Consumer Credit Protection Act.

  • Truth-in-Lending Act.

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§4: Bankruptcy and Reorganization

  • Article I, Section 8 of the U.S. Constitution. Federal jurisdiction.

  • Bankruptcy Reform Act of 1978, amended by Reform Act of 1994.

  • Federal court under U.S. district court, can appeal to district courts.

  • Secured vs. Unsecured creditors.

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Types of Bankruptcy Relief [1]

  • 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.

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Types of Bankruptcy Relief [2]

  • Chapter 11 – reorganizations.

  • Chapter 12 - adjustment of debts of family farmers with regular incomes.

  • Chapter 13 - adjustment of debts of individuals with regular incomes.

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Chapter 7: Liquidation

  • Chapter 7: Ordinary or straight bankruptcy.

    • All assets are turned over to a trustee.

    • Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged.

    • 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.

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Filing the Chapter 7 Petition

  • Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court.

  • Voluntary Petition.

  • Involuntary Petition.

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Voluntary Petition [1]

  • Petitioner must understand there are other chapters available.

  • Debtor does not have to be insolvent.

  • List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses.

  • Swear to these and sign. Federal crime to misrepresent.

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Voluntary Petition [2]

  • Court issues order of relief.

  • Clerk of court gives trustee and Creditors mailed notice of the order within 20 days.

  • Court will deny if “substantial abuse” of Chapter 7.

    • Case 16.3: In Re Lamanna(1998).

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Involuntary Bankruptcy [1]

  • Creditors force Debtor into bankruptcy proceedings, but not against a farmer or charitable institution.

  • If there are 12 or more creditors, need three or more with unsecured claims totaling at least $10,000 to join in petition.

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Involuntary Bankruptcy [2]

  • If there are less than 12 creditors, one or more having a claim of $10,000 may file.

  • Court will order relief if:

    • Debtor is generally not paying debts as they come due.

    • 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.

  • Severe penalties for frivolous petitions against debtors, including Punitive damages.

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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.

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Property of the Estate [1]

  • 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.

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Property of the Estate [2]

  • Estate includes (cont’d):

    • Proceeds and profits from the property of the estate; and

    • After-acquired property such as inheritances, property settlements, and life insurance death proceeds.

  • Case 16.4: In Re Andrews(1996).

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Creditor’s Meeting and Claims [1]

  • Ten to 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.

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Creditor’s Meeting and Claims [2]

  • Claims allowed unless disputed. If claim is disputed or unliquidated, court will decide value.

  • It is a crime to file a false claim.

  • Employment contracts and real estate.

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  • See list in text pages 350-351.

  • States may pass law requiring Debtor use state exemptions.

  • In some states, Debtor may choose state or federal exemptions.

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Bankruptcy 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.

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Trustee’s Powers

  • Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of:

    • Debtor against the creditors.

    • Lien creditors against the creditors.

    • Bona fide purchaser against the creditors.

    • Trustee still loses to the PMSI creditor who perfects within his “magic” 10-day period.

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Voidable Rights

Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.

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Preferential Transfers [1]

  • 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.

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Preferential Transfers [2]

  • 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 transfer up to $600 without constituting a preference.

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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.

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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.

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Distribution of 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 Consumer surrenders: Creditor can keep or sell

    • If creditor keeps collateral the debt is fully satisfied.

    • If creditor sells the collateral, she can use extra for costs, or can become unsecured creditor for deficiency.

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Distribution of 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 on page 353.

    • All creditors paid, trustee gives extra back to debtor.

Discharge l.jpg

  • Exceptions (p.354).

  • Objections to Discharge.

  • Effect of Discharge.

  • Revocation of Discharge.

  • Reaffirmation of a Debt.

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Exceptions to Discharge(List on p.354)

  • 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 16.5: In Re Seixas (1999).

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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.

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  • Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest.

  • Same debtors as are eligible under Chapter 7.

  • Creditors and debtors can settle private “workouts” outside of bankruptcy proceedings.

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Reorganizations [2]

  • “Fast tract” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate.

  • Debtor in Possession (DIP):

    • Trustee may be appointed.

    • DIP has same powers as trustee in Chapter 7.

      • Strong-arm clause

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Reorganizations [3]

  • Collective Bargaining Agreements.

  • Creditors Committees.

  • The Reorganization Plan:

    • Designate classes of claims and assets.

    • Specify treatment of classes.

    • Provide adequate means of execution.

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Chapter 13:Individual Repayment Plans

  • Chapter 13: For individuals with regular income who owe fixed unsecured debts of <$269,250 or fixed secured debts of <$807,750.

  • Not for partnerships, corporations.

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Law on the Web

  • U.S. Bankruptcy Code at Cornell U.

  • Creditor-Debtor relationships at Cornell U..

  • The Bankruptcy Law Finder.

  • The American Bankruptcy Institute.

  • Legal Research Exercises on the Web