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Regulation - CPA Excel > Debtor Creditor Relationship > Flashcards

Debtor Creditor Relationship Flashcards

1
Q

Suretyship

A
  • must be in writing and signed by surety
  • no consideration is required
  • creditors can request for more than 1 surety or subsurety or cosureties (same level of liability)
  • no notice of default needs to be given to sureties by creditor / creditor can demand payment from sureties
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2
Q

Rights of creditor against debtor when debtor defaults (3 rights)

A
  • proceeds against debtors property
  • proceeds against surety according to contract
  • proceeds against collateral against debtor to pay off debt and balance must be given to debtor
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3
Q

Right of Surety (4 rights)

A

Exoneration
Reimbursement and indemnify (partially/fully fulfilled obligation to creditor - right to seek reimbursement from debtor - surety has same rights as debtor)
Subrogation
Contribution

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4
Q

Exoneration

A

court order to have creditor make debtor liable before going to surety

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5
Q

Subrogation

A

Surety succeeds to the rights that creditor has

  1. creditor has rights to file bankruptcy on debtor
  2. rights to debtor collateral
  3. rights against third parties
  4. rights against co-surety
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6
Q

Contribution

A

2+ sureties liable on the same obligation to same creditor upon debtor default
Right of one cosurety against another

  • if creditor releases cosurety without other surety permission then cosurety has right to release some liability
  • if reimbursed, no right to contribution
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7
Q

Defenses for Surety (do not release Surety of liability)

A 
Insolvency of Debtor
Fraud/Misrepresentation by Debtor
Debtor's incapacity
Death of Debtor
Release of Debtor by creditor (unless guarantor of collection)
Changes or modification
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8
Q

Defenses of Surety (do release surety for liability)

A

Principal debt is paid
Surety incapacity (ex. minor in some states)
Surety’s discharge decree in bankruptcy
Statute of limitation expires
Fraud or Misrepresentation of creditor
Release of debtor without surety consent
Refusal of Debtor’s tender to payment by creditor
Material alteration by creditor (debtor is not discharged but not liable for future interest)
Creditor’s failure to disclose
Changes and modification where theres an uncompensated surety
Surrender/ Impairment of Debtor’s collateral
Special release for guaranty of collection only where they are unaware of the debtors default (notice must be given)
Statute of frauds- must be in writing

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9
Q

Which transactions are excluded from security transaction law Article 9? (there are 9)

A 
Landlord's liens
Mechanic liens
Artisans liens
Assignment of wage
Tort claims
Insurance (except for collateral)  
Judgment
Leases
Real Estate Mortgages
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10
Q

What are the requirements for the security to attach?

A
  1. a writing (signed by debtor and security agreement must describe the collateral)
  2. secured party must give something of value
  3. debtor must have rights on collateral

*when all 3 requirements are met the security attaches and creditor has rights on collateral including the right to repossess the collateral when the creditor defaults

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11
Q

What are the rights of the creditor upon security attachment?

A
  1. creditor has right to repossess the collateral
  2. creditor has right to sell the repossessed collateral
  3. priority over other unsecured creditors
  4. priority of bankruptcy over other unsecured creditors
  5. right to perfect the security interest and stand first
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12
Q

What is perfection?

A

secured party has priority on collateral over third parties

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13
Q

Filing Requirements

A
  • security agreement or UCC-1 can be filed
  • must state names of debtor and creditor
  • description of collateral
  • indication that financing statement covers all assets
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14
Q

Exceptions to central filing in the state where the debtor is located

A

Fixtures such as timber to be cut and collateral to be extracted such as oil, coal, gas minerals

Possessory security interests

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15
Q

When can a financing statement be filed?

A

Before a security attaches or agreement is made
Before debtor authorization is required
Before authentication of a security agreement constitutes the debtors authorization for the filing of a financing statement

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16
Q

When can a financing statement be perfected?

A

debtor must be authorized

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17
Q

Perfecting by possession

A 
creditor has possession of goods
pawn of goods is possession
transfer of chattel paper to creditor
field warehousing
 money
investment property
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18
Q

Automatic perfection

A
  • purchase money security interest (PMSI) in consumer goods / when a line of credit is offered by the creditor to purchase the collateral a consumer good which is perfected automatically when the interest attaches
  • PMSI is when creditor is advancing the fund in order to secure the collateral
  • no filing statement required for 20 days
  • sale of payment intangibles
  • sale of promissory notes (instrument transfer)
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19
Q

Temporary perfection

A
  • without filing or possession (applies to) for certified securities, negotiable documents, and instruments if new value is given
  • must be within 20 days of agreement
  • if perfected by possession remains perfected for 20 days without filing
  • when debtor moves out of state 4 month rule
  • 21 day rule - negotiable instruments
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20
Q

Automatic perfection in proceeds

A

PMSI in consumer (no filing)
Extends for 21 days if not perfected by filing
Proceeds
Consumer not PMSI in inventory or equipment (filing required)

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21
Q

Rights of secured parties for perfection

A

Release
Amendment
Assignment
Info Request

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22
Q

Who does a perfected security have priority over?

A 
unsecured creditors
unperfected secured parties
lien creditors
judgment creditors
trustees in bankruptcy
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23
Q

Buyer in the ordinary business will always have priority over a perfected or secured creditor.

A

True

24
Q

Buyer not in the ordinary business of consumer goods will prevail over a perfected security if it has what requirements?

A
  1. Buyer must give value to the seller-debtor;
  2. Buyer must not know of secured party’s security interest;
  3. Buyer must buy for personal use (as consumer goods); and
  4. Buyer must buy before the secured party perfects by filing a financing statement.
25
Q

What is collateral?

A

Personal property or intangible interest that is the subject of the security interest

26
Q

How long is a financing statement effective?

A

5 years otherwise a continuation statement must be filed

27
Q

PMSI in debtors inventory will have priority over perfected non PMSI when?

A

PMSI secured party perfected before debtor takes possession AND PMSI secured party sends written notice of the PMSI

28
Q

Collateral other than inventory?

A

PMSI will have priority over non PMSI if PMSI perfects within or before 20 days after the debtor takes possession of the collateral and no notice is required

29
Q

Floating lien concept

A

allows secured party to have a security interest in collateral to continue down the road

30
Q

Creditor’s right upon Debtor Default

A

Right for collateral
Right to render Collateral Unusuable
Right to pursue judicial process (if collateral cant be taken peacefully)
Right to pursue the self help remedy of repossession
Right on disposal of repossessed collateral
-Creditor must sent notice when it wants collateral and rejection must not be received within 20 days (not in consumer goods because filing statement may not be filed)
Right to deficiency judgment

31
Q

When must creditor sell collateral for a consumer good only?

A

when 60% or more of the purchase price has been paid by the debtor and must be done within 90 days of taking possession otherwise may be liable for tort

32
Q

Chapter 7

A
  • voluntary and involuntary
  • trustee (U.S Trustee appoints interim trustee after order of relief)
  • individuals, partnerships, or corporations
  • spouse can file jointly
  • Means test if doesn’t pass then goes to Ch 13
  • must receive credit counseling within 180 days for the petition
33
Q

Means test

A

debtors monthly income - allowable expenses

monthly income includes:
wages, gross income, interest, unemployment compensation, annuity, workers compensation, state disability, regular child and spousal support, rents, gross income from business farm or profession, pension and retirement income

  • does not include social security retirement benefits and income tax refunds
34
Q

Who is not eligible for Chapter 7?

A 
Railroads
Domestic Insurance Companies (Ch 11)
Credit Unions 
Savings and Loans (Ch 11) 
Banks and cooperative banks (Ch 11) 
Certain SBA entities
35
Q

Chapter 9

A
  • insolvent municipality
  • voluntary petition only
  • no liquidation
36
Q

Chapter 11

A
  • reorganization of a business debtor to pay debts
  • voluntary and involuntary
  • no trustee (debtor becomes trustee)
  • if filed by individual, must receive 180 days of counseling within filing petition
  • must have full payment of admin expenses
  • no insurance companies, banks, or savings/loans banks
37
Q

Chapter 12

A
  • adjustment of debts of a family farmer and family fisherman
  • voluntary petition only
  • automatic stay upon filing
  • trustee
  • total debts must not exceed $4,411,400 for farming operation and $1,924,550 for commercial fishing operation
  • farmer (50% debts related to farming); fisher (80%)
  • more than 50% debts in the PY must come from farming or fishing
38
Q

Chapter 13

A
  • wage earners plan (allows adjustments of an individuals regular income)
  • no partnership or corporations, applies only to individuals (including joint)
  • must have less than $419,725 in unsecured debts and $1,257,850 in secured debts
  • means test is applied
  • voluntary petition only
  • trustee
  • must undergo counseling within 180 days of the petition
39
Q

Chapter 7 involuntary

A
  • farmers are allowed

- not for profit corporations

40
Q

What are the requirements for involuntary petitions for a debtor under Chapter 7?

A
  • if debtor has 12 or more unsecured creditors with non contingent claims, the petition must be signed by 3 or more creditors whose aggregate claims are $16,750 or more to sign the petition
  • if debtor has less than 12 unsecured creditors with non contingent claims, the petition only requires 1 of these creditors with an aggregate debt of $16,750 or more to sign the petition
41
Q

Order of Relief or Stay

A

Creditors must stop collection and all pending credit proceedings are stopped (stayed) and all debts will be handled through bankruptcy and court

if trustee is appointed then the trustee is in possession of debtors property

42
Q

What is not affected by the order of relief?

A 
criminal prosecution by debtor
 collection of child or alimony
tax audits
department of housing and urban dev foreclosures
driver license suspensions 
investigations by SEC
43
Q

Once order of relief is issued, debtor must:

A
  • list creditors with amounts and addresses
  • schedule of assets and liabilities
  • state of financial offers
  • schedule of current income and expenses
  • certificate of approved credit counseling
  • copy of debtor federal income tax return
  • proof of payments received from employers
  • statement of intention to retain or surrender any property
  • appear truthfully in hearings and respond
44
Q

Trustee duties

A
  • collecting debtors property
  • accounting for all property received then making a final report to account for administration of the estate
  • investigate financial affairs of the debtor to determine what debts exist and whether the debtor has been involved in transferring property
  • furnish info concerning the estate
  • provide notice information to creditors

POWERS are to bring suits for collection, assign leases, sell property, complete releases from contracts, evaluate existing contracts, and professional fees

45
Q

Debtor Estate

A
  • tangible and intangible property
  • after acquired property within 180 days of petition (ex. gifts or municipal bonds)
  • inheritance or gift within 180 days
  • divorce, separation, or property settlement
  • beneficiary proceeds from life insurance
  • excludes benefit plan contributions
  • includes fraudulent transfers, preferences
  • property appreciation, income
46
Q

Only individuals can claim exemptions from estate, not partnerships or corporations (T/F)

A

True

47
Q

What are the exemptions of bankrupts estate

A
  • state and federal
  • if homestead acquired 3.5 years before the filing the max exemption is $170,350 and debtor must domiciled in the state for 2 years
  • household furnishings ($625)
  • IRA accounts ($1,362,800)
  • bodily injuries ($25,150)
  • interest in jewelry ($1,700)
  • private benefits such as child support alimony disability and pension
  • government benefits such as unemployment compensation
  • un-matured life insurance policies with accrued interest and dividends up to ($13,400)
  • unused portion in homestead subject to ($12,575)
  • motor vehicle ($4K)
  • homestead for residence ($50,300) state exemptions ($170,350)
48
Q

What can the trustee set aside from the debtor

A

Set aside transfers of the debtor property

  • due to incapacity, duress, failure of consideration, mistake, or undue influence
  • fraudulent transactions
  • giving an existing creditor advantage
49
Q

Elements for voidable preference for creditors

A
  • transfer of debtor property to creditor
  • for an antecedent or preexisting debt
  • made within 90 days of filing
  • made while debtor was insolvent
  • giving an existing creditor advantage
50
Q

Elements for voidable preference for insiders

A
  • an insider is an individual or business that has a close relationship with the debtor
  • transfer of debtor property to an insider
  • for an antecedent or preexisting debt
  • made within 1 year of filing
  • made while the debtor was insolvent during the time of the transfer
51
Q

What are the exceptions to the trustee set aside?

A
  1. Contemporaneous exchange between debtor and creditor for new value
  2. Payment of debt incurred in the ordinary course of business of the debtor
  3. Consumer Debtor payment of up to $6,825
  4. Payments for paternity, alimony, maintenance, and child support
  5. Companies KERP program (pay retention bonuses to employees who if they leave will be a financial harm to the company which cannot be more than 10x the amount for non-management employees)
52
Q

What are the bankruptcy distribution priorities?

A
  1. secured creditors
  2. claims for child support and alimony
  3. administration cost
    - attorneys, accountants, trustees, appraisers
  4. claims in ordinary business after petition but before order of relief
  5. employee wages
    - $13,650 maximum and excess goes to general
    - 6 months preceding petition (180 days)
  6. Contribution to benefit plans
    - $13,650 maximum and excess goes to general
    - 6 months preceding petition (180 days)
  7. Storage of grain
    - $6,725 maximum and excess goes to general
  8. Consumer Deposits (ex. mower)
    - $3,0250 maximum
  9. Taxes (state, federal, local)
  10. Claims of deaths or personal injury
  11. Unsecured creditors
53
Q

What are the non dischargable debts in bankruptcy?

A
  1. Taxes within 3 years (taxes due) or 2 years (filing of return) of filing bankruptcy
  2. Liability for obtaining money or property by false pretenses
  3. Willful and malicious injuries
  4. Debts incurred by driving DWI
  5. Alimony, maintenance, and child support
  6. Unscheduled debts unless actual notice
  7. Debts arising from fraud such as embezzlement
  8. Government fines or penalties imposed within 3 years prior
  9. Education loans due 5 years prior
  10. Prior bankruptcy debts in which the debtor waived discharge
  11. Mortgage issues
  12. SOX bonuses fraud
  13. Consumer debt incurred within 90 days of filing - $725 for luxury good, cash withdrawal on cc within 70 days - $1K
  14. Debts under reaffirmation agreements
54
Q

Conditions in which a debt MAY be denied

A

1 - partnership or corporation cannot get a discharge decree under Chapter 7 only individuals can
2 - if debtor received a discharge 8 years prior to filing
3 - intentional concealment, fraudulent claims, refusal to obey law, failure to complete education course
4- consumer debt occurred within 90 days of filing ($725 luxury good, $1K cash advances within 70 days)

55
Q

What happens if trustee requests tax audit?

A
  • if tax authority does not notify trustee within 60 days of audit or audit not completed within 180 days then trustee and dd of debtor discharged of tax liability
56
Q

Reaffirmation

A
  • must be filed with court and signed
  • must be prior to discharge decree
  • hearing approval only required if debtor not presented with attorney; none required if attorney files affadivit which means debtor has been fully advised of legal consequences
  • debtor has right to rescind 60 days within filing

Regulation - CPA Excel (7 decks)

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