Debtor & Creditor Relationships Flashcards
What is the main structure of the legislation concerning bankruptcy?
The Federal Bankruptcy Code supersedes almost all state laws regarding bankruptcy (especially concerning insolvency), but some state laws apply (e.g. real estate law)
How do state and federal bankruptcy law generally differ regarding creditors’ rights?
State law emphasizes creditors’ rights to improve their claims over other creditors, while federal law emphasizes equality among creditors within the same class
What is the BAPCPA?
Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 – limits the public disclosure of personal information in bankruptcy cases
What are the five types of bankruptcy proceedings?
Correspond to five chapters in the Federal Bankruptcy Code: Chapters 7, 9, 11, 12, and 13
9 and 12 are not as relevant to the CPA exam
What is Chapter 7 bankruptcy?
Straight bankruptcy/liquidation
Purpose is to liquidate all the debtor’s property (except for exempt property), sell it, and give the proceeds to creditors
What is Chapter 9 bankruptcy?
Sets out procedures for municipalities to work out debt repayment plans with creditors
What is Chapter 11 bankruptcy?
Seeks to reorganize a business’s finances to pay back creditors and benefit stockholders
Can be used by individuals rather than businesses, but not usually
How can a business file a shortened Chapter 11 bankruptcy plan?
If its debts are under $2 million
Can creditors for a Chapter 11 debtor offer a reorganization plan?
Yes, but only if the debtor has not proposed a plan after 18 months of filing for bankruptcy
What is Chapter 13 bankruptcy?
Reorganization for individuals – does not liquidate property except with debtor’s consent
What is Chapter 12 bankruptcy?
A special form of bankruptcy for family farmers and fishers that makes their debt situations easier to bear
In bankruptcy law, who can be a debtor?
A municipality or a person
A person can be an individual, corporation, or partnership – but not a government entity, trust, or decedent’s estate
Can just any person be a debtor?
Under federal law, if a debtor is a person, he/it must reside in the U.S. or have a residence, business, or property in the U.S.
Who cannot qualify as a Chapter 7 debtor?
(a) railroad
(b) insurance company
(c) bank or lending institution
Who qualifies as a Chapter 13 debtor?
As of 2013, an individual with regular income, under $336,900 in unsecured debts, and under $1,010,650 in secured debts
What is a court required to do for a Chapter 11 bankruptcy?
Appoint a creditors’ committee from the debtor’s unsecured creditors
For which types of bankruptcy is a court required to appoint a trustee?
Chapters 7 and 13
A trustee can still be appointed for Chapter 11
What is the means test?
Evaluates a filer’s income, debt, and living expenses – a debtor must fail it to qualify for Chapter 7 bankruptcy (though he would still qualify for Chapter 13)
Does not apply to disabled veterans who became indebted during active duty or in defending national security
What are the calculations involved in the means test?
Allowable living expenses (which includes food, housing, transportation, insurance, and many other things) are subtracted from monthly income to get a net monthly income
Net monthly income x 60 is then compared to relevant thresholds
What are the relevant thresholds for the means test in 2013?
If the five-year amount is over the upper threshold ($11,725), Chapter 7 filing is forbidden
If under the lower threshold ($7,025), Chapter 7 filing is permitted
If between the thresholds, filing is permitted only if five-year amount is less than 25% of unsecured debt
What must any debtor do before filing for bankruptcy?
Receive credit counseling from an approved counseling service within 180 days of filing
Can be exempted if it would not be necessary or if the debtor could not comply (e.g. active duty military)
If filing for bankruptcy, what forms must the debtor file with the bankruptcy court?
(a) list of creditors
(b) schedule of assets and liabilities
(c) statement of financial affairs
(d) info on payroll, taxes, and so on
Whom must the debtor notify if he files for bankruptcy?
All his creditors
If a creditor doesn’t receive notice, he won’t be penalized for continuing to collect debt
What is joint bankruptcy?
A married couple’s single petition to file for bankruptcy – requires both spouses’ consent
Main factor is determining how much to consolidate their assets and liabilities
Against whom can involuntary bankruptcy proceedings NOT be enforced?
Farmers, churches, schools, and charitable foundations
Who qualifies as a farmer?
Someone who has over 80% of his gross income come from farming, ranching, or raising livestock
What is the minimum threshold for involuntary bankruptcy for 2013?
$14,425
When can three or more creditors file for a debtor’s involuntary bankruptcy?
If the debtor has at least 12 creditors, and if the unsecured claims of the filing creditors is greater than the minimum threshold ($14,425)
What occurs if the debtor has fewer then 12 creditors?
The same rule applies, except that any number of creditors can petition for involuntary bankruptcy
Who can ordinarily file a petition for involuntary bankruptcy against a partnership?
Any number of general partners, so long as there is not a state or local law prohibiting it
Under what circumstances can people who are not general partners file a petition against a partnership?
If relief has been ordered to all general partners, then either (a) the trustee of a general partner’s estate or (b) a creditor against the partnership can file a petition against the partnership
In a partnership, who can file an answer to an involuntary petition for bankruptcy?
Any general partner that did not file for the petition
What occurs if a debtor does not, within a reasonable time, oppose (controvert) a petition for involuntary bankruptcy?
Bankruptcy court will enter an order for relief against him
What occurs if a debtor opposes a petition for involuntary bankruptcy?
There will be no order for relief unless:
(a) the debtor is generally not paying debts as they are due, OR
(b) within 120 days of the petition’s filing, a custodian took possession of the debtor’s property
What are the rights and duties of a debtor’s trustee?
He can sue or be sued, hire professionals to help him, and preside over the creditors’ meeting, among other things. He represents the bankruptcy estate.
What occurs at a meeting of creditors?
The debtor is examined, under oath, as to his activity over his finances and property, to determine whether he is fit to be discharged
Such a meeting is not always necessary
What is an automatic stay?
Legal prohibition of all efforts for collection or foreclosure
Does an automatic stay hurt creditors’ rights?
No, it simply postpones their fulfillment
It also protects creditors’ rights by prohibiting any competition between creditors to get money from the limited resources of the debtor
What does an automatic stay NOT prevent?
Acts to foreclose or take possession regarding loans insured under the National Housing Act
Notices of tax debts
Evictions in a residential lease
When does an automatic stay end (or not apply)?
When the claimed property is not part of the debtor’s estate, or when the bankruptcy case is completed
After bankruptcy is filed for, can a debtor or trustee continue to sell or lease property?
Yes, though this requires notifying any relevant parties if it is not done in the ordinary course of business
What do creditors and equity holders file with the court to prove their claim?
A creditor files a proof of claim
An equity holder files a proof of interest
If a creditor does not file to prove his claim, who else can do so on his behalf?
Anyone else who is liable with the debtor to the creditor can, or the debtor or trustee can
Can creditors make contingent claims against a debtor?
No, all claims have to be in dollar amounts, even if it requires estimation
What occurs if, after involuntary bankruptcy is filed, but before an order for relief is given, a new claim arises against the debtor?
As long as it is in the ordinary course of business, it will still be treated as a pre-petition claim
Creditors for these claims are called “middlemen” or involuntary gap creditors
What can happen if a creditor refuses to negotiate a pre-bankruptcy repayment plan with the debtor?
The bankruptcy judge can penalize him up to 20% of his claim
Why is it important to recognize administrative expenses in a bankruptcy proceeding?
Because they take priority over most unsecured creditors’ claims
These must be filed with the court, not the trustee
What are included in administrative expenses?
Costs to maintain the estate, taxes incurred by it (including any related fines), payment for trustees and other professionals employed, fees for witnesses, etc.
How do claims with different priorities get paid in Chapter 7 bankruptcy?
Lower-level claims receive nothing until the higher-priority claims are fully satisfied
If not all claims at a given level can be fully satisfied, then they are satisfied pro rata
What is the priority of claims for Chapter 7 bankruptcy?
Secured creditors Alimony & child support Administrative expenses Middleman debts Wages Employee benefits Farmers & fishers Deposits for consumer goods Tax debts DUI liabilities Unsecured creditors
So Alligators And Middlemen Won’t Eat Farmers, Depending on the Taxes Due U
How does the repayment of secured creditors work?
They can only be satisfied with the proceeds from liquidating the collateral, and they can only be satisfied to the extent of their secured claim
E.g. if the collateral sells for more than the secured claim, the secured creditor still only gets the amount of the claim (at this level of priority)
What is the maximum amount of unpaid wages which receive a priority claim?
For 2013, the maximum is $11,725 for each employee
Court approval is also required for insider payments (e.g. bonuses, severance)
Do just any unpaid wages receive a claim of priority in bankruptcy?
No, only those unpaid wages which were earned by employees within 180 days of the petition’s filing or within 90 days of the end of the debtor’s business, whichever came first
What is the maximum amount of unpaid employee benefits which receive a priority claim?
For 2013, the maximum is $11,725 for each employee MINUS the amount given for unpaid wages for the employee
Do just any unpaid employee benefits receive a claim of priority in bankruptcy?
No, only those unpaid wages which were earned by employees within 180 days of the petition’s filing or by the end of the debtor’s business, whichever came first
What is the maximum amount of priority claim that can be owed to farmers and fishers?
For 2013, the maximum is $5,775
What are priority claims for deposits on consumer goods?
They refer to individuals who purchased or rented a consumer good (or property) from the debtor and gave a deposit for it, but never received the good (or property)
What is the maximum amount of priority claim that can be owed for deposits on consumer goods?
For 2013, the maximum is $2,600 per individual
What is NOT included in the tax debts that receive a priority claim?
Fines or penalties for taxes
Once all the secured claims are settled, how is money for unsecured creditors distributed?
(1) to creditors who filed timely
(2) to creditors who filed tardily
(3) for fines or damages that arose before the order of relief on claims (even if secured), other than compensation for economic loss
(4) to repay interest accrued from the date of filing
(5) back to the debtor
How may a debtor select property to exempt from creditors?
Under either the federal exemption system or his state’s exemption system
What is generally included under an exemption system?
Claims in residential property, a car, consumer goods, jewelry, tools of the trade, certain dividends and interest, rights to social security and welfare benefits, and other things
When can exempt property still be seized?
After the case, it can still be seized for (1) taxes not discharged by bankruptcy, (2) alimony and child support, and (3) any liens that the trustee did not avoid
How often can someone be discharged with a Chapter 7 bankruptcy?
Generally, once every eight years
When would a debtor be required to file for Chapter 13 bankruptcy?
If he received a Chapter 7, 11, or 12 discharge in the last four years, or if he received a Chapter 13 discharge in the last two
What debts does a Chapter 7, 11, or 13 bankruptcy NOT discharge?
Taxes, fines, unscheduled debts, alimony and child support, educational loans, cash advances, DUI debts, and other things
Are debts for malicious injury and fraud dischargeable?
If the debtor has not listed creditors for these kinds of debts, then they cannot be discharged, but if he has and the creditor has not initiated proceedings for it, then they are discharged
What are bankruptcy offenses?
Acts which prevent a debtor from receiving a discharge, if committed on or within one year of the filing date
What are some examples of bankruptcy offenses?
Lying under oath, withholding info from a trustee who is entitled to it, destroying or concealing property, etc.
What property of the debtor does not become part of his estate?
(1) earnings after bankruptcy has commenced
(2) any power exercised for another’s benefit (e.g. power of appointment)
(3) property the debtor holds in trust, unless it is a bare legal title (i.e. not held for another’s benefit)
What are avoiding powers?
Powers to avoid claims by creditors
What avoiding powers does a trustee have over liens?
He can avoid liens
(1) which became effective upon the debtor’s insolvency or bankruptcy
(2) which, at the date of filing, are not enforceable against a BFP (bona fide purchaser)
(3) related to rent
What are preferential transfers?
Essentially, they are payments made to creditors before the bankruptcy filing which the debtor then demands to be returned
What are the elements of a preferential transfer?
Benefits the creditor
Already-existing debt
Ninety days before filing
Minimum of $5,850 (for 2013)
Insolvent debtor
Creditor received more than he would through bankruptcy
Can a transfer be a preferential transfer if it is made earlier than 90 days before the bankruptcy filing?
Yes – if the creditor is an insider who had grounds to believe the debtor would be insolvent, then it can still be a preferential transfer if it occurs one year before the filing date
If the property is later transferred to a non-insider, it is not recoverable
What cannot qualify as a preferential transfer?
- repayments of debts in the ordinary course of business within 45 days of the debts’ being incurred
- purchase money security interests (i.e. collateral which secured the loan to purchase the collateralized item itself)
- security interests in A/R or inventory
- alimony and child support
What other kind of transfers can a trustee avoid?
Fraudulent transfers, if made within two years of the filing date
What transfer can a trustee avoid for a partnership debtor?
Any transfer made to a general partner within one year of the filing, if the partnership was (or became) insolvent at the time of the transfer
What is the Truth in Lending Act of 1968 (TILA)?
Requires the written disclosure of credit terms for any consumer credit sale or loan up to $25,000 (or for any amount if the debtor has collateral)
Credit terms = interest (quoted as an APR), fees, sales charges, insurance, etc.
What is open-end credit?
An arrangement where the debtor is permitted to repay numerous credit transactions either in one lump sum or in installments – e.g. credit cards
Also called revolving credit
What is closed-end credit?
An arrangement where the debtor makes various periodic (and often fixed) payments – e.g. car payments or mortgages
What are adjustable rate mortgages (ARMs)?
Mortgages where the interest rate changes according to an index
Also called variable rate mortgages
What is the Fair Credit Reporting Act (FCRA)?
Ensures that credit reporting agencies are accurate when reporting consumer credit histories, prohibiting any false or obsolete information
For the FCRA, when does credit information usually become obsolete?
After 7 years
For bankruptcy info, after 10 years
According to the FCRA, what must reporting agencies do before making investigative reports?
Give written notice to the consumer
According to the FCRA, are consumers entitled to receive files about themselves from reporting agencies?
Yes, they can receive copies of their files on request
Info includes recipients of the data in the last 6 months (or in the last 2 years, if done for employment purposes)
According to the FCRA, what can consumers do if they encounter inaccurate info about themselves?
Challenge the bad info
The consumer can also include his own explanation of any dispute in his file
What is the Equal Credit Opportunity Act of 1974 (ECOA)?
Prohibits businesses from refusing to give credit on the basis of race, color, religion, national origin, sex, marital status, or age – and thus restricts what questions can be asked in a credit application
Enforced by Federal Trade Commission
What other discrimination is prohibited by the ECOA?
Credit cannot be refused solely because the applicant’s income comes from welfare or because he exercised a right under the Consumer Protection Act
What does the ECOA require when creditors notify applicants of acceptance or refusal of credit?
Creditors must notify applicants within 30 days, and give specific reasons for any refusal
What is the Fair Debt Collection Practices Act of 1977 (FDCPA)?
Prohibits abusive debt collection practices by debt collectors
Applies to third-party debt collectors, not to the internal collectors of a creditor
What sort of abusive debt collection practices are forbidden by the FDCPA?
- third-party communication (only may be for finding a debtor’s location, but cannot disclose why)
- reaching the debtor at unusual times, including at work (if the employer doesn’t permit it)
- contacting the debtor’s attorney
- using threats or obscenities, or false info
Does the FDCPA ever require debt collectors to stop communicating with a debtor?
Yes – if the debtor provides written notice that he refuses to pay (or otherwise tells the collectors to stop)
The collector can then seek remedies for breach (and tell the debtor he is doing so)
How often are telemarketers required to sync their do-not-call list with the national do-not-call registry?
Every three months
Violations incur a fine up to $11,000
Which organizations are exempted from honoring the do-not-call registry?
If not forbidden by state law, charities, political organizations, telephone surveyors, and insurance businesses can call
What situations allow someone to be called, even if he is on the do-not-call registry?
(1) an established business relationship (within 18 months)
(2) if the customer made an inquiry (within 3 months)
(3) if the customer provides written permission
What are statutory liens?
Liens created by operation of law – as opposed to consensual liens
What are different kinds of consensual liens?
(1) secured transactions – secured by personal property
(2) mortgages – secured by real property
(3) suretyship contracts – secured by a third person’s promise
What are mechanic’s liens and artisan’s liens?
Mechanic’s liens = statutory liens given to someone who repairs or improves real property, where the liened item is itself the real property
Artisan’s liens = statutory liens given to someone who improves personal property, where the liened item is itself the personal property
-This lien ends if the artisan transfers possession of the property
What are other kinds of statutory liens?
(a) bailee’s liens = storers of property, like warehousemen, can retain possession of property until they are paid for
(b) landlord’s/innkeeper’s liens = payment for rent or hotel rooms can be secured through personal property kept on the premises
(c) tax liens = a government entity can place a lien to secure payment for overdue taxes
What are judicial liens?
Liens created by legal judgment or levy – different from statutory liens, which occur more in the ordinary flow of things
If different unsecured creditors are in a race to obtain an insolvent debtor’s assets, what are different actions they might pursue?
(1) attachment = obtain a writ of attachment, which designates property to be the creditor’s
(2) execution = obtain a writ of execution, which actually enforces the attachment, i.e. seizes the designated property (usually so it can then be sold)
(3) garnishment = obtain an order of garnishment, which requires a third party to give money due the debtor to the creditor instead (often an employer, though sometimes a bank)
What is a fraudulent conveyance?
A transfer of property by the debtor in order to delay, hinder, or defraud creditors – can be an exchange that has unfair consideration involved
E.g. selling a car for $1 to someone else in order to prevent creditors from seizing it
Can any property of the debtor’s be transferred in a fraudulent conveyance?
No: if exempt property is transferred, it cannot be a fraudulent conveyance
What is an assignment for the benefit of creditors (ABC)?
The debtor voluntarily gives the legal title for his nonexempt property to a trustee (the assignee), who then liquidates it and distributes money to the creditors
What is a composition agreement?
A contractual agreement of several creditors with a debtor to accept a smaller but early payment to satisfy his full debt to them
What is an extension agreement?
A contractual agreement of several creditors with a debtor to satisfy their full debt over a period of time past the due date
Under what circumstances can participating creditors void a composition or extension agreement?
If either (a) they were not made aware of the NON-participating creditors or (b) a creditor was secretly given special treatment
What is an equity receivership?
An arrangement, supervised by the court, for an appointed “receiver” to take possession (but not title) of the debtor’s property and use it accordingly
Can involve liquidation, holding the property, and operating the debtor’s business
How does an equity receivership affect liens?
Even though the title does not pass to the receiver, creditors’ liens are unenforceable during receivership
Who are the three parties in a suretyship contract?
(1) principal debtor
(2) creditor
(3) surety
In a suretyship contract, is a surety primarily liable?
Yes, which means that his duty to pay is not contingent upon the debtor’s becoming insolvent – he is liable if the debtor does not pay for any reason
What is a surety bond?
A written acknowledgement of a surety relationship
What are different kinds of surety bonds?
(1) construction bonds = guarantee the performance of supply or construction contracts (though not necessarily the payment of workers’ wages) – also called performance bonds
(2) fidelity bonds = guarantee the faithful performance of employee duties
(3) official bonds = guarantee the faithful performance of duties by a public official (required by law)
(4) judicial bonds = all bonds in judicial proceedings (e.g. bail bonds)
Can partnerships and corporations enter into suretyship contracts?
Partnerships can if the partnership agreement doesn’t forbid it, though a partner cannot bind the partnership to such a contract without express authorization
Corporations generally cannot, unless suretyship is a power specifically authorized
Do indemnification contracts count as suretyship contracts?
No, because they only involve two parties (e.g. when an insurance company insures an individual in case of loss)
Is extra consideration normally given in a suretyship contract?
Normally a suretyship contract is made at the same time as the primary contract, so there’s no extra consideration – but there would need to be extra if the suretyship contract were made later
How does a guaranty contract differ from a suretyship contract?
It is usually made as a separate agreement with extra consideration, and a guarantor’s liability is secondary rather than primary (i.e. contingent on the debtor defaulting)
How does an unconditional guarantor differ from a conditional guarantor?
An unconditional guarantor automatically becomes liable upon the debtor’s default, whereas a conditional guarantor also requires some conditional precedent to become liable
Usually the condition involves the creditor exhausting other options
Is a creditor permitted to proceed immediately against the surety before trying to collect from the debtor?
Yes, since the surety is primarily liable
The creditor doesn’t even need to liquidate the debtor’s collateral if he defaults – he can still collect all from the surety
How are co-sureties liable for a shared obligation?
Usually it is stipulated by the particular contract, but in general, they are jointly and severally liable to the creditor, each being liable for the amount which they personally guaranteed
Can two people be co-sureties if they do not know each of them are co-sureties?
Yes – they only need to share the same obligation
How is a sub-suretyship different from a co-suretyship?
A sub-suretyship involves a surety (the principal surety) who is primarily liable for the entire amount and another surety (the sub-surety) who is liable for him
What is the formula used to determine how much co-sureties should contribute?
liability assumed by co-surety /
liability assumed by all co-sureties x
total amount paid on debt thus far =
required contribution of co-surety thus far
What is an example of a calculation of co-sureties’ required contributions?
On a $60k debt, A is liable for $16k, B for $20k, and C for $24k. The debtor defaults, and A pay $45k. This satisfies 3/4 of the total debt (45/60), so that the effective contribution for A, B, and C thus far is $12k, $15k, and $18k respectively. At this point, B and C owe A $15k and $18k, and if that is paid, all of them will still owe $4k, $5k, and $6k (respectively) to pay off their liability in full.
How is a co-surety’s share in collateral calculated?
liability assumed by co-surety /
liability assumed by all co-sureties x
amount of collateral =
share in collateral
What happens if a creditor releases a co-surety?
That automatically releases other co-sureties by the amount of the released co-surety’s liability
What kind of right might a co-surety have against other co-sureties?
A right of contribution – i.e. a right to their contributions if he pays more than his share
What kind of right might a surety have against the principal debtor?
Right of indemnity/reimbursement – this right does not accrue if the surety pays voluntarily
What is a surety’s right of exoneration?
When a surety files a suit against the debtor to show that the debtor is wrongly withholding assets in order to avoid paying the debt, he is exercising his right to exoneration (i.e. his right not to pay)
What is a surety’s right of subrogation?
His right to obtain the rights which the creditor has upon the debtor, after fulfilling his end of the bargain
E.g. the surety can gain a lien which the creditor had on the debtor
What may the surety do if a creditor induces a debtor into a contract through fraud or duress?
The surety is bound or not depending on whether the debtor accepts the contract or voids it
What may the surety do if the debtor induces the surety into making his promise through fraud or duress?
The contract is not voidable unless the creditor was aware of the fraud
How might a surety avoid liability for his duty?
If the creditor failed to inform him of material facts regarding the debtor’s ability to pay
What happens if a creditor releases a debtor’s collateral before the debtor’s debt is satisfied?
The surety’s duty is released by the amount of the collateral
What happens if a creditor releases a co-surety without the consent of the other co-sureties?
They are thereby released as well
What happens if a creditor releases the principal debtor without the surety’s consent?
The surety is released, unless the creditor reserved rights against the surety
The surety still has a right to collect from the debtor, in this case (and thus it’s not really a release as much as a promise of the creditor not to sue the debtor)
If the principal debtor’s contract is modified, how does it affect the surety’s obligations?
The surety is discharged only if the contract is materially altered – unless the surety consents to the changes
