Consumer Issues, Credit, and Bankruptcy Lecture Notes

Negotiable Instruments and Payment Obligations

  • Definition of Negotiable Instruments:
        * These are defined as promises or orders to pay a fixed amount of money.
  • Common Examples of Negotiable Instruments:
        * Checks.
        * Promissory notes.
        * Certificates of deposits.
        * Bills of exchange/drafts.
  • Requirements for Negotiability:
        * The instrument must be written.
        * It must be signed by the maker or the drawer.
        * It must contain an unconditional promise or order to pay.
        * The amount to be paid must be a specific sum of money.
        * It must be payable on demand or at a set, predetermined time.
        * It must be payable to order or to bearer.
  • Categorization of Negotiable Instruments:
        * Orders to Pay:
            * Drafts: A binding order for a bank to pay a sum of money (quoted in text as \).
            * Checks: A specific type of order to pay that is payable on demand.
        * Promises to Pay:
            * Promissory Notes: An explicit promise made by one party to pay another party.
            * Certificates of Deposit (CDs): A promise issued by a bank to repay a specific sum of money it has received.

Credit Principles and Application

  • General Definition of Credit:
        * Described as "Borrowed money."
        * Involves a creditor lending credit to a debtor.
        * The debtor is mandated to pay the principal amount back, typically accompanied by interest, within a designated timeframe.
  • Applying for Credit:
        * Lenders and banks provide credit in exchange for installment payments plus interest.
        * Lenders often request a credit report to evaluate the consumer's ability to repay the loan.
        * If an applicant's credit history is poor and they do not appear able to repay, security may be required in the form of collateral, a surety, or a guarantor.
  • Secured Credit:
        * A form of credit where the creditor is entitled to specifically identified property of the debtor, known as collateral.
        * Collateral serves as part of the debt satisfaction if the debtor fails to fulfill the promise to pay.

Forms of Secured Credit

  • Security by Agreement:
        * Suretyship: A situation where a third party promises to pay on behalf of the debtor if the debtor fails to pay.
        * Guaranty: A situation where a third party provides a guarantee of payment on behalf of the debtor in the event of non-payment.
  • Real Property Mortgages:
        * Defined as a type of lien.
        * The transcript notes: "A type of lien where the mortgagor retains the right to foreclose upon and resell property if the mortgagee fails to repay the mortgage."
  • Liens:
        * Refers to security obtained through the operation of law.
        * Grants the creditor the legal right to repossess goods held by the debtor if the debtor defaults.

Areas of Consumer Protection and Regulation

  • Food & Drug Regulation:
        * FDA Food Safety & Nutrition Labeling: Oversight of how food is labeled and the safety of the food supply.
        * FDA Drug Safety & Effectiveness: Regulation regarding the efficacy and safety of pharmaceutical products.
  • General Consumer Protection:
        * FTC Regulation of Advertising: Oversight by the Federal Trade Commission regarding how products are marketed.
        * FTC and Deceptive & Unfair Practices: Enforcement against practices that mislead consumers.
        * False Advertising & the Lanham Act: Legal framework for addressing untruthful advertising claims.
  • Primary Regulatory Bodies:
        * The Federal Trade Commission.
        * The Bureau of Consumer Protection.

Primary Federal Consumer Credit Protection Laws

  • Truth in Lending Act (TILA):
        * Legal Citation: 15 U.S.C. §§ 1601−1667f15\,U.S.C.\,\text{\sect\sect}\,1601-1667f, as amended.
        * Requires creditors to provide written disclosures regarding financial responsibilities, including APRs (Annual Percentage Rates), transaction fees, and origination charges.
        * Establishes both civil and criminal penalties for violations.
  • Consumer Lending Act:
        * Applies to personal leases that extend over a period of four months.
        * The obligation value covered under this act must not exceed $50,000\$50,000.
  • Consumer Credit Card Act:
        * Function as an amendment to the Truth in Lending Act.
        * Places limits on interest rate increases.
        * Establishes restrictions on fees, specifically including late fees.
        * Requires creditors to provide notice of rate increases and specifies requirements for when bills must be distributed.
  • Fair Credit Reporting Act (FCRA):
        * Regulates the activities of credit bureaus and ensures the accuracy of credit reports.
        * Amended by the Fair & Accurate Credit Transaction Act, which provides consumers with free annual credit reports.
  • Equal Credit Opportunity Act (ECOA):
        * Prohibits discrimination in the granting of credit based on race, sex, color, religion, national origin, marital status, poverty, or age.
  • Fair Debt Collection Practices Act (FDCPA):
        * Provides for transparent and fair notice during the collection of debts.
        * Permits a debtor to dispute the validity of a debt within a period of 3030 days.
        * Grants consumers a legal cause of action against any debt collector who violates the act and causes actual damage.

Washington State Consumer Protection

  • WA Consumer Protection Act:
        * Legal Citation: RCW 19.86RCW\,19.86.
        * The act is enforced by the Washington State Attorney General.

The Bankruptcy Code and Creditor Priority

  • Legal Foundation:
        * The Bankruptcy Code: Located in U.S.C. Title 11U.S.C.\,Title\,11.
        * Enacted by the United States Congress in 19781978.
        * Constitutional authority is derived from Article I, Section 88, of the United States Constitution, which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies."
  • Creditor Priority (Hierarchical Order of Repayment):
        1. Secured creditors.
        2. Costs associated with preserving or administering the debtor’s estate.
        3. Unpaid wage claims.
        4. Certain claims held by farmers and fishermen.
        5. Refunds for security deposits.
        6. Child and spousal support obligations.
        7. Taxes.
        8. General unsecured creditors who are eligible to file a proof of claim.

Bankruptcy Chapters: 7, 11, and 13

  • Chapter 7 Bankruptcy:
        * Nature: Most filings are "Voluntary."
        * Eligibility: Filed by individual or business debtors.
        * Process: Debtors request a discharge of debts due to an inability to repay. Certain assets may be liquidated by an administrator.
        * Distribution: Repayment to creditors from the liquidated pool is made in proportional shares.
        * Outcome: Creditors typically receive little to none of the debt owed to them.
  • Chapter 13 Bankruptcy:
        * Nature: All Chapter 1313 bankruptcies are categorized as "Voluntary."
        * Eligibility: Only available to individual debtors and sole proprietorships; other business entities are excluded.
        * Process: Establishes a court-protected repayment plan that occurs over the course of several years.
  • Chapter 11 Bankruptcy:
        * Nature: Reorganization rather than liquidation.
        * Eligibility: Available to businesses that wish to continue operations rather than discharging all debts.
        * Theory: Businesses remaining in operation are considered more likely to eventually repay their debts.
        * Process: The debtor business typically negotiates a repayment plan with all creditors and submits said plan to the Court for approval.
        * Goal: The primary objective is to "restructure" the business rather than forcing a "discharge" of debt.