1. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Chapter 21: Creditors’ Rights and Bankruptcy

2. 2 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives What is prejudgment attachment? Writ of execution? How does a creditor use these remedies? What is garnishment? When might a creditor undertake a garnishment proceeding? In a bankruptcy proceeding, what constitutes the debtor’s estate in property? What property is exempt under federal bankruptcy law? What is the difference between an exception to discharge and objection to discharge? In a Chapter 11 reorganization, what is the role of the debtor in possession?

3. 3 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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.

4. 4 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Laws Assisting Creditors Garnishment. –Creditor permitted to collect a debt by seizing property held by third party (usually wages held by debtor’s employer). Creditors’ Composition Agreements: liquidated debts.

5. 5 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Laws Assisting Creditors Mortgage Foreclosure. –Creditor (mortgagee) has the right to foreclose on property upon debtor’s (mortgagor) default.

6. 6 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Suretyship & Guaranty Third person promises to pay debt owed by another.

7. 7 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Suretyship & Guaranty Third person promises to pay debt owed by another. –Surety (3 rd person is primarily liable). –Guaranty (3 rd person is secondarily liable). Must be in writing unless the “main purpose” of the guaranty is to personally benefit the guarantor. Case 21.1 Capital Color Printing, Inc. v. Ahern. Document satisfied Statute of Frauds, identified Quality Printing as the customer with a signed personal guaranty.

8. 8 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Suretyship & Guaranty Actions that Release the Surety and Guarantor. Defenses of Surety and Guarantor: –Can assert any defense of principal debtor except debtor’s incapacity or bankruptcy (which are personal to debtor). Rights of Surety and Guarantor: –Subrogation. –Reimbursement (from debtor). –Contribution.

9. 9 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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.

10. 10 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bankruptcy Proceedings Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. Bankruptcy Reform Act of 2005 significant modified bankruptcy laws. Federal Bankruptcy Courts under U.S. district courts, can appeal to district courts. Federally appointed judges.

11. 11 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Types of Bankruptcy Relief Bankruptcy provides different relief: –Chapter 7: Liquidation. –Chapter 11: Corporate Reorganizations. –Chapter 12: Family Farmers. –Chapter 13: Adjustment of Individuals’ Debts with a payment plan. Special Treatment of Consumer- Debtors.

12. 12 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 7 - Liquidation Any person (including corporation) can file. All debts are liquidated (discharged). Begins with a voluntary or involuntary Filing of a Petition (Automatic Stay). –Voluntary: filed by debtor. –Involuntary: creditors force debtor to file. –2005 Act: Debtors must go through counseling with approved nonprofit agency during the 180 days prior to filing.

13. 13 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 7 2005 Act: Attorney must file affidavit explaining other chapters available to debtor. 2005 Act: Attorney must make reasonable attempt to verify accuracy of petition and schedules. Failure to do so could be perjury. –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.

14. 14 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2005: Substantial Abuse Under 2005 Act, Substantial Abuse will Be Presumed If: –Based on “Means Testing” debtor’s family income is greater than state median income. –Creditors have standing to dismiss petition. Substantial Will NOT be Presumed If: –Based on “Means Testing” debtor’s family income is less than state median income. –But creditors have no standing to dismiss. Order for Relief.

15. 15 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 7 – Involuntary Occurs when debtor’s creditors force debtor into bankruptcy proceedings. Can occur if: –If debtor has twelve or more creditors, three or more with claims totaling $13,475, or –If debtor has twelve or more creditors, one has a claim totaling $13,475.

16. 16 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Automatic Stay Automatic Stay upon Filing either Voluntary or Involuntary Petition. Creditors cannot commence or continue most legal actions. Damages for violation of stay. Case 21.2 In re Kuehn. Kuehn owed $6,000 in tuition and filed bankruptcy. University’s refusal to provide transcript, unless she paid the tuition, violates automatic stay.

17. 17 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Automatic Stay Exceptions to Automatic Stay: –Collection can continue for domestic-support obligations. –Proceedings against debtor in divorce, domestic violence can continue. –Investigations by securities enforcement are not stayed. Limitations on Automatic Stay: –Creditors can get “adequate protection.” –Periodic or one time cash payments or equivalent. –Reaffirmation.

18. 18 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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.

19. 19 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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.

20. 20 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. Creditors’ Meeting and Claims

21. 21 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. Creditors’ Meeting and Claims

22. 22 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Up to $20,200 in home equity. Up to $3,225 in car. Up to $10,775 in personal possessions (up to $525 per item). Up to $1,350 in jewelry. Up to $2,025 in tools. Social security, alimony and support payments. Up to $20,200 in personal injury awards. 2005 Act: Homestead Exemption. –Debtor must have lived in state two years. –Up to $136,875 of equity. Exemptions

23. 23 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Trustee’s Powers Court-appointed until first meeting of creditors. Creditors elect permanent trustee Administers estate. Collects proceeds, liquidates assets and pay Creditors in order of priority.

24. 24 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Trustee Rights and Duties New Duties under the 2005 Bankruptcy Reform Act: –Promptly review all materials filed by debtor. –Not later than 40 days after filing, Trustee must file: a motion to dismiss the case, change to Chapter 13, or why motion would not be appropriate. –New duties to protect domestic-support obligations.

25. 25 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Trustee Rights and Duties Right to Possession of Debtor’s Property. –Constructive Possession (change lock on door). Avoidance Powers. –Trustee can set aside a sale or transfer of debtor’s property (2005 Act: cannot avoid bona fide domestic support debt). Voidable Rights. –Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.

26. 26 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. 2005 Act: permits consumer-debtor to transfer any property to creditor up to $5,475.

27. 27 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 transfer up to $5,000 without constituting a preference. Domestic-support debts are not preferences.

28. 28 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Other Trustee Powers 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. 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.

29. 29 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Distribution of Property

30. 30 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. If Secured Creditors: –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. Distribution of Property

31. 31 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. Distribution to Unsecured Creditors

32. 32 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 7-Discharge Exceptions.  Objections to Discharge.  Effect of Discharge. Revocation of Discharge. Reaffirmation of a Debt.

33. 33 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. Student Loans. Exceptions to Discharge Case 21.3 Mosely. Federal student loans cannot be discharged absent a showing of undue hardship. Mosely proved undue hardship by showing physical and emotion problems.

34. 34 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Objections to Discharge Bankruptcy may also deny the discharge of the debtor (not the debt): –If debtor intentional concealment or destruction of property or financial records. – Granting of discharge within 8 years of previous bankruptcy discharge. –Debtor’s failure to complete credit counseling courses. –Debtor found guilty of felony. Revocation of Discharge.

35. 35 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 before discharge. Reaffirmation of Debt

36. 36 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 11-Reorganization 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. Focus is on “Best Interests” of the Creditors.

37. 37 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 11-Reorganization “Fast track” 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).

38. 38 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 11-Reorganization Debtor in Possession (DIP). –Trustee may be appointed. –DIP has same powers as trustee in Chapter 7. Strong-arm clause. Creditors’ Committees.

39. 39 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 11-Reorganization Plan Acceptance and Confirmation of the Plan. –(2005 Act: Confirmation does not discharge a debtor.) –Rehabilitates debtor and conserves estate. –Court may “cram down” plan on all creditors. Plan must be equitable and: –Designate classes of claims and interests. –Specify treatment to be afforded the classes. –Provide adequate means for execution.

40. 40 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. Not for partnerships or corporations. Chapter 13- Individuals’ Repayment Plan

41. 41 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 13-Individuals’ Repayment Plan The Repayment Plan. –For all or a portion of debts to be paid during a period not to exceed 3 years. –Confirmation Hearing for 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).

42. 42 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 12: Family Farmer and (Fisherman, 2005) Plans. –“Family Farmer” (Or Fisherman): 50% of gross income comes from farming (or fishing) and whose debts are 80% farm (commercial fishing) related. –Procedure for filing. –Content of plan. –Court confirmation. Chapter 12-Family Farmers and Fishermen