Chapter 15: Debtor-Creditor Relationships

Question 1

What are the characteristics of a preferential transfer of property?

Answer 1

I-WAIT

Debtor was Insolvent when the transfer was made

Within 90 days of filing the peitition

For Antecedent debt (pre-existing debt)

Improves a creditor’s position

Time is increased from 90 days to 1 year for an insider

Question 2

What does attachment do for a secured party?

Answer 2

Protects the party against the debtor.

Gives the party the right to repossess collateral when the debtor does not pay their debt.

Question 3

What is needed for an involuntary bankruptcy if there are 12 or more creditors or if there is less than 12?

Answer 3

12 or more creditors - Need 3 or more signatures from unsecured creditors with claims of at least $16,750 in the aggregate

Less than 12 creditors - Need 1 or more signatures from unsecured creditors with claims of at least $16,750 in the aggregate

Question 4

What is an order of relief?

Answer 4

An action that stops all creditors from pursuing claims directly and begins the orderly procedures of bankruptcy

Question 5

What is a purchase money security interest (PMSI)?

Answer 5

A legal claim that allows a lender to either repossess property financed with its loan or to demand repayment in cash if the borrower defaults.

Question 6

What is the order of distribution for a bankruptcy?

Answer 6

Secured Creditors

Fully secured - if collateral worth more than debt then trustee gets excess

Partially secured - If collateral is worth less than the debt then the creditor is unsecured for the remaining balance

Priority Claims (STOP-IT Drunk Driver)

Support and alimony

Trustee, accountant, attorney, admin fees

Owed after petition date in involuntary gap

Payroll (90 days up to 13,650)

Indivudal consumer deposits (up to 3,025)

Tax claims within 3 years of petition

Drunk driver claims

General/unsecured creditors - Any excess after paying these creditors goes to the debtor

Question 7

What is one of the three ways a creditor can achieve perfection?

Answer 7

FAT

File a financing statement

Automatic perfection

• A purchase money security interest (PMSI) is automatically perfected without filing or taking possession as soon as it attaches

Take possession of the collateral

Question 8

What are the four transfers a trustee of a bankruptcy estate can take back in to the estate?

Answer 8

FLAP

Fraudulent transfers by the debtor within 2 years of petition

Liens by statute

After filing the petition, a transfer was made by the debtor

Preferential treatment

Question 9

What is the loophole for automatic perfection and how can you close it?

Answer 9

The loophole is if a debtor sells consumer goods to another good faith consumer, the new purchaser takes the property free of the automatic perfection (garage sale rule)

Can close the loophole by filing a financing statement within 20 days of attachment

Question 10

What are the three different types of bankruptcy?

Answer 10

• Chapter 7 - Liquidation
• Chapter 11 - Business Organization
• Chapter 13 - Debt Adjustment Plan

Question 11

What is a cosurety and what right does it have?

Answer 11

co-surety is when there is one or more people acting as sureties on a debt.

Each co-surety has a right of contribution from the others

Ex: If person A pays the creditor 6,000, they have the right to obtain 3,000 each from the other two sureties.

Question 12

What three things must happen for attachment to occur?

Answer 12

PIG

Property owned by the debtor

Interest is created (One of two ways)

• Signed security agreement. Signed by debtor and has description of collateral
• Take posession (pledge as collateral)

Give value to the debtor

• Cannot use promise to give value in the future

Question 13

What is the inventory rule?

Answer 13

Anyone who buys goods as a good/equipment is free of prior claims.

Ex: Sony sells a TV to Costco. I buy the TV from Costco. If Costco doesn’t pay Sony for the TV I don’t have to give the TV back to Sony as collateral as long as I use it as inventory.

Question 14

What is automatic stay?

Answer 14

When the debtor’s assets are frozen so the courts can take an accounting

Question 15

What is the involuntary gap?

Answer 15

Time between filing of the petition and order of relief

Question 16

What are the exceptions that a debtor still has to pay if they are discharged of their debt?

Answer 16

A Credit card SLUT STD

Alimony or child support

Credit card purchases for luxury goods up to 725 or more within 90 days of filing and cash advances of 1,000 or more and auto loans within 3 years

Loans obtained by fraud

Unscheduled/unlisted debt: If creditor wasn’t on list during bankruptcy then you owe the whole amount if discovered

Student loans

Tax claims within 3 years

Securities violations under Sarbanes Oxley

Debts incurred to pay Taxes

Drunk driver injuries or death

Question 17

What are the three types of suretyship agreements?

Answer 17

1. Primary: Person agrees to be cosigner. Treated as a debtor even if there is no default.
2. Secondary: Person agrees to be guarantor or endorser. Treated as a debtor only if original debtor defaults.
3. Last Resort: Person agrees to be a conditional surety or guarantor of collection. Only have to pay if all other means of collection have been exhausted.