Chapter 23 Creditor’s Rights and Bankruptcy

Learning Objectives What is prejudgment attachment? Writ of execution? How does a creditor use these remedies? What is garnishment? What is the debtor’s estate? What property is exempt under bankruptcy law? What is the difference between an exception to discharge and objection to discharge? In Chapter 11, what is the role of the debtor in possession?

Laws Assisting Creditors Liens Mechanic’s Lien (real property) Artisan’ Lien (personal property) Innkeeper’s Lien (baggage of guests) Judicial Lien Attachment: court-ordered seizure of property Writ of Execution: court-ordered sale Garnishment Creditor permitted to collect a debt by seizing property held by third party (usually wages held by debtor’s employer)

Laws Assisting Creditors Mortgage Foreclosure Creditor (mortgagee) has the right to foreclose on property upon debtor’s (mortgagor) default. Suretyship and Guaranty Third person promises to pay debt owed by another Surety (3rd person is primarily liable) Guaranty (3rd person is secondarily liable)

Laws Assisting Debtors Homestead Exemption Family home free from claims of unsecured creditors or trustees in bankruptcy. Other Exemptions: Household furniture Clothing and personal possessions Vehicle Tools of the trade

Bankruptcy and Reorganization Business Law Handout 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. Federally appointed judges. (c)2002 West Publishing

Bankruptcy and Reorganization Bankruptcy provides different relief: Chapter 7: Liquidation (wipe out all debt) Chapter 11: Corporate Reorganizations Chapter 12: Family Farmers Chapter 13: Adjustment of Individuals’ Debts with a payment plan.

Chapter 7-Liquidation Most familiar. Any person (including corporation) All debts are discharged. Begins with a voluntary or involuntary Filing of a Petition (Automatic Stay) Voluntary: filed by debtor Involuntary: creditors force debtor to file Order for Relief

Chapter 7 Debtor must understand there are other chapters available. Business Law Handout Chapter 7 Debtor 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. (c)2002 West Publishing

Business Law Handout Chapter 7 Automatic Stay upon Filing of Petition: 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 equivalent. (c)2002 West Publishing

Business Law Handout Chapter 7 – Creditors 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. (c)2002 West Publishing

Chapter 7 – Creditors 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.

Chapter 7 – Property Debtor’s Estate includes: Business Law Handout Chapter 7 – Property 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. (c)2002 West Publishing

Chapter 7 – Property 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.

Chapter 7 – Property Exempted Property (Federal) Up to $17,425 in home equity Up to $2,775 in car Up to $9,300 in personal possessions (up to $450 per item) Up to $1,150 in jewelry Up to $1,750 in tools Social security, alimony and support payments.

Chapter 7 – Trustee Court-appointed until first meeting of creditors. Business Law Handout Chapter 7 – 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. (c)2002 West Publishing

Chapter 7 – Trustee’s Powers Business Law Handout Chapter 7 – 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. Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent. (c)2002 West Publishing

Business Law Handout Trustee – Preference 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. (c)2002 West Publishing

Trustee – Preference 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.

Business Law Handout Trustee -- Liens 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. (c)2002 West Publishing

Business Law Handout 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. (c)2002 West Publishing

Chapter 7 -- Property Distribution Business Law Handout Chapter 7 -- Property Distribution 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. (c)2002 West Publishing

Chapter 7 -- Property Distribution Business Law Handout Chapter 7 -- Property Distribution 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. (c)2002 West Publishing

Chapter 7 -- Discharge Exemptions. Objections to Discharge. Business Law Handout Chapter 7 -- Discharge Exemptions. Objections to Discharge. Effect of Discharge. Revocation of Discharge. Reaffirmation of a Debt. (c)2002 West Publishing

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.

Chapter 7 -- Reaffirmation 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.

Chapter 11 -- Reorganizations Business Law Handout Chapter 11 -- Reorganizations 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. (c)2002 West Publishing

Chapter 11 “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” (private negotiated settlements).

Chapter 11 Debtor in Possession (DIP). Business Law Handout Chapter 11 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. (c)2002 West Publishing

Chapter 11 Reorganization Plan Rehabilitates debtor and conserves estate Plan must be equitable and: Designate classes of claims and interests. Specify treatment to be afforded the classes. Provide adequate means for execution.

Business Law Handout Chapter 13 – Repayment Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$290,525 or fixed secured debts of <$871,550. Not for partnerships, corporations. (c)2002 West Publishing

Chapter 13 – Repayment Repayment Plan For all or a portion of debts to be paid during a period not to exceed 3 years. Confirmation of the Plan Hearing for interested parties to object to plan. Court will confirm (order) the plan after creditors approve. Objections to the Plan Discharge balance of debt (after completion of all payments in the plan)

Chapter 12 – Family Farmer Business Law Handout Chapter 12 – Family Farmer Chapter 12: Family Farmer Plans “Family Farmer”: 50% of gross income comes from farming and whose debts are 80% farm related. Procedure for filing. Content of plan. Court confirmation. (c)2002 West Publishing