Exam 4 - Chapter 16 (Creditor Law) Flashcards
Debtor & Creditor
U.S. is credit Economy
Debtor
Borrower in credit transaction
Creditor
Lender in credit Transaction
Unsecured Credit
- Creditor relies on debtor’s promise to repay (plus interest) when due.
- Legal action if debtor fails to make payments.
- Example: Credit Card
Secured Credit
Credit that requires security that secures payment of loan.
-Collateral can be repossessed to recover amount if debtor fails 2 make payment.
Example: House or car
Security Interests in Real Property
Mortgage
- Note and Deed of Trust
- Recording of Statues
- Foreclosure
- Deficiency Judgement
- Right of Redemption
- Land Sales Contract
Mortgage
2 party instrument
- Real property used as collateral
- -owner/debtor is mortgagor
- -creditor is mortgagee
Note and Deed of Trust
Used in place of mortgage in some states
- Note is evidence of borrower’s debt.
- Deed of trust gives creditor security interest in property.
- -3 party instrument
- -Legal title of property placed with trustee until owner-debtor (truster) pays the beneficiary
Recording Statute
- Mortgage and deed of trust must be recorded at country recorder’s office.
- Gives potential lenders and purchasers notice as to claims against policy.
- Nonrecordation does not effect legality of instrument.
- Improperly recorded instrument not effective against subsequent purchasers or other mortgages.
Foreclosure
In case of default, mortgage can declare entire amount due and payable.
Foreclosure Sale
- Legal Procedure by which secured creditor causes judicial sale of secured real estate to pay default loan.
- Must name party having interest in property as defendant.
- Property sold at judical sale, mandated by statutes.
- Most states permit foreclosure by power of sale.
Deficiency Judgement
Some states permit mortgagee to bring separate legal action to recover deficiency from mortgager.
- If successful, court awards deficiency judgment.
- Entitles mortgagee to recover amount of judgement from mortgagers property.
- -(Amount of money house sold for, doesnt cover debtor’s debt).
Right of Redemption
Allow mortgager to redeem real property after default and before foreclosure.
-Requires mortgager to pay full amount of debt incurred by morgagee because of mortgagor’s default.
(the right to reclaim property)
Statutory period of redemption
Mortgagor can redeem for full amount for specific time
If purchaser defaults Land Sales contract..
Seller declares forfeiture and retakes possession of property.
Material Person’s Lien
-Makes real property to which improvements are being made become security for payment of services and materials for improvements.
($10,000 car, bank holds title to it until money paid example)
Obtaining Material Persons Lien
- Lienholder must file notice of lien
- Must state amount of lien, name of claimant, name of owner of property and description of real property.
- Must be filled in specific time period.
- Notice must be given to owner of real property.
- Lien release
Secured Transaction
Transaction when creditor makes loan to debtor in exchange for debtor’s pledge of personal property as security. (Think of Joe needing 5000$ from Al, Joe never returned Al’s wheelbarrel. So Joe gave Al his mustang as collateral if Joe did not reimburse him for 5000$ and wheelbarrel
Secured Party
Seller or lender in whose favor there is a security interest, including party to whom accounts has been sold. (AL)
Security Interest
Interest in personal property or fixtures that secures payment or performance. (Mustang)
Security Agreement
Agreement between debtor and secured party that creates or provides for security interest.
collateral
Property subject to security interest, including accounts and chattel paper that have been sold.
Tangible Personal Property
Equipment Vehicles Furniture Computers Clothes Jewelry
Intangible Personal Property
Securities
Patents
Trademarks
Copyrights
Personal Property and Credit
Personal Property is often sold on Credit.
Unsecured Credit Personal Property
No interest in collateral
If debtor defaults, creditor must sue debtor
Secured Credit Personal Property
Purchaser pledges collateral
Creditor may recover collateral in case of default
Secured Transaction
Creditor extends credit to debtor and takes security interest.
Secured party is seller, lender, or third party.
Secured party can foreclose on collateral if debtor fails to pay.
Governed by Revised Article 9 of the UCC.
Personal Property Subject to a Security Agreement
Goods Instruments Chattel paper Documents of title Accounts General intangibles
Goods
Consumer goods bought or used primarily for personal, family, or household purposes
Equipment bought or used primarily for business
Farm products including crops, livestock and supplies used or produced in farming operations
Inventory held for sale or lease, including work in progress and materials
Fixtures affixed to real estate so as to become part thereof
Instruments
such a checks, notes, stocks, bonds, and other investment securities
Personal Property subject to a Security Agreement Cont.
Chattel paper, such as a conditional sales contract
Documents of title, including bills of lading and warehouse receipts
Accounts, such as accounts receivable
General intangibles, such as patents, copyrights, money franchises, and royalties
Written Security Agreement
The agreement between the debtor and the secured party that creates or provides for a security interest.
Written Security Agreement Valid if
Clearly describe the collateral so that it can be readily identified.
Contain the debtor’s promise to repay the creditor, including terms of repayment.
Set forth the creditor’s rights upon the debtor’s default.
Be signed by the debtor
Attachment
Debtor must have current or future legal right in or right to possession of collateral.
Rights of secured party attach to collateral.
Creditor has enforceable security interest in property.
Debt can be satisfied out of collateral
Floating Lien Concept
A security interest in property that was not in possession of the debtor when the security agreement was executed.
Floating Lien can attach too…
After-acquired property
Future advances
Sale proceeds
Default
Failure to make scheduled payments when due, bankruptcy of the debtor, breach of the warranty of ownership as to collateral, and other events defined by the parties to constitute default
Default and Remedies
Upon default by the debtor, the secured party may reduce his or her claim to judgment, foreclosure, or otherwise enforce his or her security interest by any available judicial procedure.
Debtor Considered in Default if
Fail to make scheduled payments.
File for bankruptcy.
Breach the warranty of ownership as to the collateral.
Are in violation of any event defined in the security agreement.
UCC remedies for Default
Taking possession of the collateral
Relinquishing the security interest and proceeding to judgment on the underlying debt
Security agreements covering real and personal property
Repossession
The secured party may cure the default by taking possession of the collateral.
The secured party may then:
Retain the collateral.
Sell or dispose of the collateral and satisfy debt from proceeds.
Retention of collateral
The secured creditor may retain possession.
Must notify debtor, unless debtor renounced rights in writing.
-Secured creditor may not retain property if:
There is a written objection.
The goods are consumer goods and the debtor has paid 60 percent of the cash price or loan
Disposition
The creditor may dispose of goods in any commercially reasonable method.
The proceeds must first be applied to:
Reasonable expenses of retaking, holding, and preparing collateral for sale.
Satisfying balance owed.
Satisfaction of any subordinate claims.
Debtor gets surplus
Deficiency and Redemption
The secured party may bring an action to recover any deficiency.
The debtor or another secured party may redeem the collateral before the lienholder has disposed of it, entered into a contract for sale, or discharged the debtor’s obligations.
Relinquishing Security Interest
The creditor may relinquish his security interest and proceed to judgment to recover underlying debt.
-Usually chosen when value of collateral has been reduced below value of secured interest
Surety Arrangement
Third person (surety or co-debtor) agrees to be liable for payment of another person’s debt.
Surety is also called accommodation party or cosigner.
Surety is primarily liable for paying principal’s debt
Guaranty Arrangement
Third person (guarantor) agrees to pay debt of principal debtor if he defaults. Guarantor is secondarily liable on debt.
Defenses of Surety or Guarantor
The defense of fraudulent inducement to enter as guarantor/surety may be alleged.
Duress may be alleged.
Guarantor/surety may not assert debtor’s incapacity
Enforcement of Remedies: Writ of Attachment
Orders the sheriff to
Seize property in the possession of the breaching party that he or she owns, and
To sell the property at auction to satisfy the judgment.
Enforcement of Remedies: Writ of Garnishment
Orders that
Wages, bank accounts, or other property of the breaching party that is in the hands of third parties be paid over to the non-breaching party to satisfy the judgment
Federal Bankruptcy Law
Article I, section 8, clause 4 :The congress shall have the power. . .to establish. . .uniform laws on the subject of bankruptcies throughout the United States.
Bankruptcy law is federal law.
There are no state bankruptcy laws
Federal Bankruptcy code
Bankruptcy Reform Act (1978) completely revised the law.
This is the Bankruptcy Code.
Bankruptcy Amendments and Federal Judgeship Act (1984) amended the Code
Types of Bankruptcy
The Bankruptcy Code is divided into chapters Chapter 7 - Liquidation Bankruptcy Chapter 11 - Reorganization Bankruptcy Chapter 12 - Family Farmer Bankruptcy Chapter 13 - Consumer Debt Adjustment
Fresh Start
The primary purpose of federal bankruptcy law is to discharge the debtor from burdensome debts.
The law gives debtors a fresh start by freeing them from legal responsibility for past debts.
Bankruptcy Courts
Bankruptcy courts decide core proceedings regarding bankruptcy cases.
allowing creditor claims
deciding preferences
confirming plans of reorganization
The jurisdiction of the bankruptcy courts became effective on July 10, 1984.
Consumer Debt Adjustment
Chapter 13:
A rehabilitation form of bankruptcy that permits the courts to supervise the debtor’s plan for the payment of unpaid debts by installments.
Filing the Petition
A Chapter 13 proceeding can be initiated only by the voluntary filing of a petition by the debtor.
Must allege insolvency or inability to pay debts as they become due
Extension gives longer period to pay debt
Composition provides for reduction of debt
Creditors cannot file an involuntary petition to place a debtor in Chapter 13 bankruptcy
Automatic Stay
The filing of a Chapter 13 petition automatically stays:
Liquidation bankruptcy proceedings
Judicial and non-judicial actions by creditors to collect prepetition debts from the debtor
Collection activities against co-debtors and guarantors of consumer debts
Obtaining, perfecting, or enforcing liens
Attempts to set off debts
The Plan of Payment
A Chapter 13 is a form of reorganization bankruptcy.
The debtor must file a proposed plan of payment on how the debts are to be rescheduled.
The debtor’s plan of payment must be filed within 15 days of filing the petition.
Payments must begin within 30 days of filing plan.
Confirmation of the Plan
The plan may modify the rights of unsecured creditors and some secured creditors
The plan must
Be proposed in good faith
Pass the feasibility test
Be in the interests of the creditors
Plan Confirmation
Automatic if secured creditors accept plan.
Court may confirm and allow creditor to retain lien.
Vote of unsecured creditors not necessary
Discharge
A discharge is granted to a debtor in a Chapter 13 consumer debt adjustment bankruptcy only after all the payments under the plan are completed by the debtor.
Even if the debtor does not complete the payments called for in the plan, the court may grant the debtor a hardship discharge
Liquidation Bankruptcy-Chapter 7
The most familiar form of Bankruptcy.
The debtor’s nonexempt property is sold for cash,
The cash is distributed to the creditors, and
Any unpaid debts are discharged.
Liquid Bankruptcy-Chapter 7 Cont.
Any person (including individuals, partnerships, and corporations) may be debtors in a Chapter 7 proceeding. Certain businesses (including banks, savings and loan associations, credit unions, insurance companies, and railroads) are prohibited from filing bankruptcy under Chapter 7
Bankruptcy Procedure
Filing a petition Order for relief Meeting of the creditors Appointment of a trustee Proof of claims
Voluntary Petition
Filed by debtor.
Only needs to state that filer has debts.
Must include schedules showing creditors, property owned, financial affairs, current income and expenses, and be sworn to.
Involuntary Petition
Filed by any creditor.
Placed debtor in bankruptcy.
If more than 12 creditors, must be filed by 3 of them
Order for Relief
Filing a voluntary petition or an unchallenged involuntary petition constitutes an order for relief.
If involuntary petition is challenged, court will decide if relief should be granted
Meeting of Creditors
Within 10 to 30 days of the court granting the order for relief, the court will call a first meeting of creditors
Judge will not be present
Debtor must answer questions, but can have counsel
Bankruptcy trustee is elected
Bankruptcy Trustee
Takes possession of property
determines secured, unsecured, and exempt property
Examines claims
Invests, manages, sells, or disposes of property
Distributes the proceeds of the estate
Reports to the court
The Bankruptcy Estate
An estate created upon the commencement of a Chapter 7 proceeding.
It includes all the debtor’s legal and equitable interests in real, personal, tangible, and intangible property, wherever located, that exist when the petition is filed, minus exempt property
Exempt Property
Property that may be retained by the debtor pursuant to federal or state law.
Debtor’s property that does not become part of the bankruptcy estate.
The Bankruptcy Code also permits states to enact their own exemptions.
Many states require the debtor to file a Declaration of Homestead prior to bankruptcy.
Statutory Distribution of Property
Nonexempt property of the bankruptcy estate must be distributed to the debtor’s secured and unsecured creditors pursuant to the statutory priority established by the Bankruptcy Code.
A secured creditor’s claim to the debtor’s property has priority over the claims of unsecured creditors
Distribution to Secured Creditors
All secured creditors claims have priority over those of unsecured creditors
Secured creditors may:
Accept collateral as full payment
Foreclose on collateral and use proceeds to pay debt
Allow trustee to retain collateral, dispose of it, and remit proceedings of sale
Distribution to Unsecured Creditors
The statutory priority of unsecured creditors is:
Fees and expenses of administering the estate.
Secured claims of “gap” creditors.
Wages, salaries, commissions.
Contributions to employee benefit plans.
Farm producers and fishermen for storage or processing.
Claims for cash deposited by consumers with debtor.
Child support, alimony, spousal support.
Certain tax obligations.
Claims of general unsecured creditors.
Any balance is returned to debtor.
Discharge Liquidated Bankruptcy
The termination of the legal duty of a debtor to pay debts that remain unpaid upon the completion of a bankruptcy proceeding.
Only individuals may be granted a discharge.
Not all debts are dischargeable in bankruptcy.
Discharge is not available to partnerships and corporations.
Acts that Bar Discharge
Making false representations about his or her financial position when he or she obtained an extension of credit
Transferring, concealing, or removing property from the estate with the intent to hinder, delay, or defraud creditors
Acts That bar discharge Cont.
Falsifying, destroying, or concealing records of his or her financial condition
Failure to account for any assets
Failure to submit to questioning at the meeting of the creditors (unless excused)
Fraudulent and Preferential Damages
The Bankruptcy Code prevents debtors from making unusual payments or transfers of property on the eve of bankruptcy that would unfairly benefit the debtor or some creditors at the expense of others
Voidable Transfers
Preferential transfers within 90 days before bankruptcy
Preferential liens
Preferential transfers to insiders
Fraudulent transfers
Reorganization Bankruptcy- Chapter 11
A bankruptcy method that allows reorganization of the debtor’s financial affairs under the supervision of the Bankruptcy Court
Reorganization Bankruptcy- Chapter 11 Cont.
Reorganization Bankruptcy- Chapter 11 Cont. Chapter 11 is used primarily by businesses to reorganize their finances under the protection of the Bankruptcy Court.
The debtor usually emerges from bankruptcy a “leaner” business, having restructured and discharged some of its debts
Reorganization Proceeding
Chapter 11 is available to individuals, partnerships, corporations, non-incorporated associations, and railroads.
Chapter 11 is not available to banks, savings and loan associations, credit unions, insurance companies, stockbrokers, or commodities brokers
Debtor in Possession
A debtor who is left in place to operate the business during the reorganization proceeding.
The court may appoint a trustee to operate the debtor’s business only upon a showing of cause.
Creditors Committee
The creditors holding the seven largest unsecured claims are usually appointed to the creditors’ committee.
Representatives of the committee appear at Bankruptcy Court hearings, participate in the negotiation of a plan of reorganization, assert objections to the plan, etc.
Automatic Stay Reorganization Bankruptcy
The result of the filing of a voluntary or involuntary petition.
The suspension of certain actions by creditors against the debtor or the debtor’s property.
Relief from stay - asked for by a secured creditor.
Plan of Reorganization
A plan that sets forth a proposed new capital structure for the debtor to have when it emerges from reorganization bankruptcy.
The debtor has the exclusive right to file the first plan of reorganization.
Any party of interest may file a plan thereafter
Executory Bankruptcy
A contract that has not been fully performed.
Chapter 11 reorganization bankruptcy permits a debtor (with court approval) to assume or reject executory contracts.
e.g., leases for office space, and sales and purchase contracts.
Rejection of Collective Bargaining Agreement
A collective bargaining agreement may be rejected or modified as an executory contract if:
It is necessary to the reorganization,
The debtor acted in good faith, and
The balance of the equities favors rejection or modification of the agreement
Confirmation of a Plan of Reorganization
A plan of reorganization must be confirmed by the court before it becomes effective.
Confirmation is either by:
The acceptance method, or
The “cram down” method
Confirmation by the Acceptance Method
The Bankruptcy Court must approve a plan of reorganization if:
The plan is in the best interests of each class of claims and interests,
The plan is feasible,
At least one class of claims votes to accept the plan, and
Each class of claims and interests is non-impaired.
Discharge Reorganization Bankruptcy
Upon confirmation of a plan of reorganization, the debtor is granted a discharge of all claims not included in the plan.
The plan is binding on all parties once it is confirmed.
Family Farmer Bankruptcy-Chapter 12
Chapter 12 is a reorganization provision of the Bankruptcy Code.
Allows family farmers to reorganize financially.
Gives family farmers added protection not available under Chapter 11.
Land Sales Contract
Arrangement where owner of real property agrees to sell property to purchaser, who agrees to pay owner over agreed period of time.
-Often to sell undeveloped property and farms
