D216 Unit 5 - Bankruptcy

Creditor

the one who is owed the money

Lien:

Claim on property in order to satisfy a debt

Mechanic's Lien:

Work done on real property - Real property is fixed property, principally land and buildings.

Worker can place Mechanic's Lien on the property

which must be cleared and paid by debtor/property owner before selling property. Lienholder can also technically foreclose property.

Artisan's Lien:

Work done on personal property

A worker can place a lien on someone's personal property (Car, Truck, Jewelry, Dry cleaner, etc.

if the owner does not pay for the work or partially pays.

Lien releases when you give up the property

voluntarily surrender

Foreclosure on Personal Property

right to sell the personal property to satisfy the debt.

Mechanic Lien Example

e Fix roof (improvement to real property), don't get paid, file lien with local authority (governed by state law).

Artisan Lien Example

improve personal property, example a mechanic fixed your car, don't pay for the repairs, mechanic can keep your car. Lien released when the mechanic gives your car back.

Judicial Lien:

If a debtor fails to pay after a due date, a creditor can bring legal action against them in order to collect a debt. - GET JUDGMENT

Writ of Attachment:

Court order taking of debtor's property before judgment. Pre-judgment remedy. Assets taken into custody of the court (so debtor can't dispose of assets before judgment). State law

Writ of Execution:

After judgment for creditor. This orders the seizure and selling of a debtor's nonexempt property which is then paid to debtor (after paying cost of sale, etc.) Only happens if property located in courts jurisdiction.

Garnishment

Order of the court permits creditor to collect debt by seizing property of the debtor held by a third party.

Taken through paychecks, tax refunds, bank accounts, and possibly property.

Suretyships and Guaranty

When a third person promises to pay a debt owned by another. MUST BE IN WRITING

Both Suretyships and Guaranty are

co-signer for debt ****

Surety:

Primarily liable for a debtor's obligation. Creditor can go after Surety even if debtor does not default.

Guaranty:

Secondarily liable for a debtor's obligation. Creditor can only go after Guaranty after the debtor defaults.

Release a surety and guaranty are the same. If any one of these conditions are met, a release is enacted

•Material Modification

•Surrender of Property

•Payment or tender of payment

Material Modification:

Any modification of the original contract without the surety's consent

Surrender of Property:

If the creditor surrenders collateral to the debtor or reduces value of collateral

Payment or tender of payment:

When the debtor pays the creditor the amount owed. (if creditor refuses payment, obligation discharged)

Defenses of co-signer

1. Incapacity and bankruptcy

2. Statue of Limitations

3. Fraud

Incapacity and bankruptcy

personal defenses, only asserted by those affected. Ex. If debtor files bankruptcy, surety/guarantor still liable

Statue of Limitations

Principal can use statute of limitation suretys cannot use statute of limitations

Fraud

if co-signer is fraudulently induced to co-sign, fraud is a defense.

Right of Subrogation

Any rights that the creditor has against the debtor are rights that a surety has against a debtor

Right of Reimbursement

A surety is entitled to be reimbursed from the Debtor.

Right of Contribution

If there are two or more sureties, a surety has the right to receive compensation from other sureties if the paid amount was more than their proportional amount.

Mortgages

Secure loan on purchase of real property.

Fixed Rate

unchanged interest rate for life of loan

Adjustable-rate Mortgage (ARM)

interest rate changes periodically as describe in the contract.

Fail to pay can result in Foreclosure

legal process to repossess the property

How to Avoid Foreclosure:

1. Forbearance

2. Workout Agreement

3. Short Sale

Forbearance

postpone some of the loan payments to the future

Workout agreement

Delay foreclosure for addition financial information

Short Sale

Loan holders agrees to take less than the balance due on the mortgage.

Debtor Protection Exemptions

things the creditor cannot take from the debtor. Generally, rule is to leave the debtor with some assets.

Each state has its own list of exemptions

all exempts LIMITED BY AMOUNT

Homestead Exemption

on real property - goal to ensure debtor has shelter.

Personal Property Exemptions

Personal property - goal to ensure transportation, clothing, etc.

1. Household Furniture

2. Clothing and household goods

3. Vehicle

4. Tools of your Trade

Bankruptcy law in the United States has two main goals:

1. To protect a debtor by giving him or her a fresh start without creditors' claims.

2. To ensure equitable treatment of creditors who are competing for a debtor's assets.

Bankruptcy Court

Federal

Types of Bankruptcy

Chapter 7, 11, and 13.

Chapter 7

Liquidation proceedings (selling all nonexempt assets and the distribution of the proceeds to the debtor's creditors)

Chapter 11

Business reorganizations

Chapter 13

Personal repayment plans for individuals with regular income

Chapter 7 Liquidations

Debtor turns all assets over to a bankruptcy trustee (person appointed by court to manage debtor's funds). Who sells non-exempt assets, distributes proceeds to creditors, debtor gets discharge.

Debtors can be

individuals, partnership and corporations (Chapter 7)

Railroads, insurance companies, banks, savings and loans, credit unions

CANNOT FILE Chapter 7

Farmers and Charitable institutions

cannot be forced in involuntary bankruptcy (Chapter 7)

Before you can file you must

prove attendance at an approved nonprofit credit counseling within 180 days prior of filing

Must complete Means Test

determine if qualified to file (not allowed if you have disposable income)

Creditors of the debtor force

the bankruptcy proceedings.

For an INVOLUNTARY ACTION to be filed, the following requirements must be met:

1. If the debtor has twelve or more creditors, three or more of these creditors having unsecured claims totaling at least $16,750 must join in the petition.

2. If a debtor has fewer than twelve creditors, one or more creditors having a claim totaling $16,750 or more may file.

Once bankruptcy petition is filed

the automatic stay suspended all actions by creditor to collect against debtor.

Automatic Stay

Stops collection call, mail, legal proceeding (lawsuits)

Adequate Protection Doctrine

protect secured creditors, force debtor to make payment(s) to creditor or give additional collateral to protect creditor's secured interest.

Exceptions to the Automatic Stay

1. Domestic-support obligations

2. Proceedings against the debtor related to divorce, child custody or visitation, domestic violence, and support enforcement are not stayed.

3. Investigations by a securities regulatory agency

3. Statutory liens for property taxes

When you file bankruptcy everything you owned at the time of filing is considered

your estate.

** after-acquired property

such as gifts, inheritances, property settlements (from divorce), and life insurance death proceeds—to which the debtor becomes entitled within 180 days after filing may also become part of the estate

Goal is to set a dividing line

after acquired remains the debtors

Bankruptcy Trustee

Job is to collect the debtor's available estate and reduce it to cash for distribution.

Trustee has:

1. Strong-arm power (equivalent to lien holder)

2. Powers of avoidance (void sales and take back property of estate)

Preference

debtor not permitted to make payments/transfer assets in favor of one creditor over another within 90 days of filing. Trustee can use its power to get the money/item back.

NOT EXEMPT from Chapter 7

BANK ACCOUNTS, CASH, FAMILY HEIRLOOMS, COLLECTIONS OF STAMPS AND COINS, SECOND CARS, VACATION HOMES

Creditors Meeting

Debtor required to attend, is interview by trustee and possibly creditors to verify information in petition is correct.

Creditors Claim

If assets found creditor must file proof of claim with court within 90 days of creditors' meeting.

Creditor paid if assets found:

Each class get paid in full before moving to next class

1) Secured Creditors

2) Unsecured Creditors

3) Debtor

MOST Chapter 7 are no-asset filing

creditors get nothing

Discharge

Upon completion of the process, debtor gets a discharge. It means they are released from their discharagble debt and the creditor cannot try to collect anymore.

Exceptions to Discharge - NOT ALLOWED

1. Claims for back taxes within two years

2. Loan on retirement accounts

3. Government fines and penalties

4. Student Loans - unless undue hardship

5. Drunk Driving judgments

6. Claims for creditors not listed in bankruptcy petition

Bankruptcy court may deny discharge if:

•Debtor fraudulent conceal assets

•Discharge within eight years before filing petition

•Failure to attend consumer education course

COURT CAN REVOKE DISCHARGE WITHIN ONE YEAR IF

THEY DISCOVER DEBTOR ACTED FRAUDULENTLY OR DISHONESTLY DURING BANKRUPTCY PROCEEDINGS.

Reaffirmation Agreement

taking back a debt you could have discharged through bankruptcy.

If you want to retain secured property

you must enter into reaffirmation agreement.

Secured debt

if you want to walk away from debt you must give secured property back (any balance owed is unsecured and can get discharged in bankruptcy)

Chapter 11

Reorganization

Corporate debtors

reorganized business debts

Debtor in Possession (DIP)

Debtor retains control of the business (unless incompetent than a trustee/receiver appointed)

Creditor Committees

unsecured creditor form committees to consult with trustee on the bankruptcy.

Fast Track for small business debtors

no need for committees if liability under 2.7 million and not own or manage real estate.

Plan

conserve debtor's assets to return to solvency.

Acceptance of Plan

each class of creditor must accept by 2/3 of amount of total claim approve plan.

If no accepted plan, anyone can propose a plan

if accepted by one class court can force a cram-down provision. Accept plan over object of a class of creditors.

Chapter 13

Individual Repayment Plan

Chapter 13 Individuals

have regular income

Chapter 13 Payments

made to the court (trustee appointed) to pay creditors in full or in part depending on plan

Chapter 13 Plan

generally runs 3 years, maximum length 5 years.

Chapter 13 Discharge

after debtor completed all payments, court grants discharge of all debts provide for the in the repayment plan.

Chapter 13 Discharge Exceptions:

1. Long-terms debts (mortgages, car payments)

2. Tax claims and payment on retirement accounts

3. Domestic Support Obligations 3. Debts for driving under the influence claims