Ch 13 Creditor-Debtor Relations and Bankruptcy

1. How does a mechanic’s lien assist creditors?

   1.  a person who has contracted for labor, services, or materials to be furnished for making improvements on real property does not immediately pay for the improvements

   2. liens simply remain on the books of the state until the house is sold. At closing (when the sale is finalized), the seller agrees to pay any mechanic’s liens out of the proceeds of the sale before the seller receives any of the funds

   3. Generally, the lienholder must file a written notice of lien within a specific time period (usually within 60 to 120 days) from the last date that material or labor was provided

2. What is the homestead exemption? What does it protect?

   1. Each state permits the debtor to retain the family home, either in its entirety or up to a specified dollar amount, free from the claims of unsecured creditors or trustees in bankruptcy. The purpose of the homestead exemption is to ensure that the debtor will retain some form of shelter

   2. In a few states, statutes allow the homestead exemption only if the judgment debtor has a family

3. In a Chapter 7 bankruptcy, what happens if a court finds that there was “substantial abuse”? How is the means test used?

4. What types of debts cannot be discharged in bankruptcy?

   1. Federal and state income taxes accruing within two years before bankruptcy, property taxes for the prior year, and amounts borrowed to pay such taxes.

   2. Claims against property or funds obtained by false pretenses, fraud, theft, or breach of a fiduciary duty.

   3. Claims by creditors who were not notified of the bankruptcy.

   4. Domestic-support obligations and property settlements that are part of a divorce or separation.

   5. Claims for amounts due on a retirement account loan.

   6. Claims based on willful or malicious conduct by the debtor toward another or the property of another.

   7. certain government fines and penalties.

   8. Consumer debts of more than $725 for luxury goods or services owed to a single creditor incurred within ninety days of the order for relief.

   9. Judgments against a debtor resulting from the debtor’s operation of a motor vehicle, boat, or plane while intoxicated.

   10. Debts arising from a violation of securities laws.

   11. Student loans, unless payment of the loans imposes an undue hardship on the debtor and the debtor’s dependents.

Grounds for denial of discharge to the debtor:

1. concealment or destruction of property with the intent to hinder, delay, or defraud a creditor.

2. fraudulent concealment or destruction of financial records.

3. grant of a discharge to the debtor within eight years before the petition was filed

4. debtor’s failure to complete the required consumer education course.

5. debtor’s failure to complete the required consumer education course.

When a discharge is denied under any of these circumstances, the debtor’s assets are still distributed to the creditors. After the bankruptcy proceeding, however, the debtor remains liable for the unpaid portion of all claims

5. In a Chapter 11 reorganization, what is the role of the debtor in possession?

   1. Similar to trustee in ch 7

   2. Business that is reorganization but still operating business

6. How does Chapter 13 bankruptcy differ from bankruptcy under Chapter 7 and Chapter 11?

   1. Individuals with regular income who owe fixed (liquidated) unsecured debts of less than $394,725 or fixed secured debts of less than $1,184,200 may take advantage of bankruptcy repayment plans. Partnerships and corporations are excluded.

   2. can be initiated only by the debtor’s filing of a voluntary petition or by court conversion of a Chapter 7 petition

• Remedies regardless of secured or unsecured creditor

  • Article 9 of UCC -> certain for only secured creditors

• Mechanic’s liens: statutory liens

• artisan’s liens were recognized at common law

• LIENS generally take priority over other claims against the same property

• Sale of foreclosed property is used to pay debt and legal proceedings and surplus goes to formal owner?

• With artisan lien: lienholder ordinarily must have retained possession of the property and have expressly or impliedly agreed to provide the services on a cash, not a credit, basis

  • lien remains in existence as long as the lienholder maintains possession, and the lien is terminated once possession is voluntarily surrendered

• procedure for attachment

  • The creditor files with the court an affidavit (a written statement, made under oath). The affidavit states that the debtor has failed to pay and indicates the statutory grounds for seeking attachment.

  • The creditor must post a bond to cover at least the court costs, the value of the property attached, and the value of the loss of use of that property suffered by the debtor.

  • When the court is satisfied that all the requirements have been met, it issues a writ of attachment . The writ directs the sheriff or other officer to seize the identified property. If the creditor prevails at trial, the seized property can be sold to satisfy the judgment.

• Federal bankruptcy laws (as amended) are called the Bankruptcy Code

  • Bankruptcy Code is contained in Title 11 of the United States Code and has eight chapters

  • Chapters 1, 3, and 5 of the Code contain general definitional provisions, as well as provisions governing case administration, creditors, the debtor, and the estate. These three chapters normally apply to all kinds of bankruptcies.

• Bankruptcy proceedings are held in federal bankruptcy courts, which are under the authority of U.S. district courts

  • can be appealed to the district courts

• debtor (except for a municipality) need not be insolvent to file for bankruptcy relief under the Code

• Railroads, insurance companies, banks, savings and loan associations, investment companies licensed by the Small Business Administration, and credit unions cannot be debtors in a liquidation bankruptcy

• Ch 7 can be dismissed for violent crime/drug trafficking offense or failure to pay post petition domestic support 

• involuntary case cannot be filed against a charitable institution or a farmer (an individual or business that receives more than 50 percent of gross income from farming operations

• The bankruptcy court will enter an order for relief if it finds either of the following:

  • The debtor is not paying debts as they come due.

  • A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of the debtor’s property within 120 days before the filing of the petition.

• Exceptions to automatic stay:

  • Domestic support obligations

  • Proceedings related to divorce/child custody/domestic violence

  • Investigations by securities regulatory agency

  • Certain property taxes

• Estate in property (before the filing, or within 180 days of filing)

  • Community property (spouses)

  • Property transferred in transaction voidable by trustee

  • proceeds/profits from property of estate

• any reason that a debtor can use to obtain the return of her or his property can be used by the trustee as well: fraud, duress, incapacity, and mutual mistake

• Ch 7 exemptions:

  • A portion of equity in the debtor’s home (the homestead exemption).

  • Motor vehicles, up to a certain value (usually just one vehicle).

  • Reasonably necessary clothing, household goods and furnishings, and household appliances (the aggregate value not to exceed a specified amount).

  • Jewelry, up to a specified value.

  • Tools of the debtor’s trade or profession, up to a specified value.

  • A portion of unpaid but earned wages.

  • Pensions.

  • Public benefits, including public assistance (welfare), Social Security, and unemployment compensation, accumulated in a bank account.

  • Damages awarded for personal injury up to a specified amount.

  • NOT: bank accounts, cash, family heirlooms, collections of stamps and coins, second cars, and vacation homes

• Secured creditors become unsecured for the difference of collateral and debt

• Proceeds are distributed proportionately to creditors

• businesses with debts of less than $2.56 million that do not own or manage real estate can avoid creditors’ committees

• Reorganization plan: 

  • Designate classes of claims and interests.

  • Specify the treatment to be afforded to the classes of creditors. (The plan must provide the same treatment for all claims in a particular class.)

  • Provide an adequate means for the plan’s execution. (Individual debtors are required to utilize postpetition assets as necessary to execute the plan.)

  • Provide for payment of tax claims over a five-year period.

Default: Failure to pay as promised

Secured creditors: loans are backed by collateral

Collateral: specific property (such as a car or a house) pledged by a borrower to ensure repayment

unsecured creditors: not backed by collateral

Lien: A claim against specific property to satisfy a debt, under common or statutory law

Judicial liens: used by a creditor to collect on a debt before or after a judgment is entered by a court

mechanic’s lien: A statutory lien on the real property of another to ensure payment to a person who has performed work and furnished materials for the repair or improvement of that property

Foreclosure: the process by which a creditor legally takes a debtor’s property to satisfy a debt

artisan’s lien: A possessory lien on personal property of another person to ensure payment to a person who has made improvements on and added value to that property

writ of attachment: A court’s order to seize the debtor’s property issued prior to a judgment in the creditor’s favor

writ of execution: A court’s order to seize the debtor’s property issued after a judgment

Attachment: The legal process of seizing another’s property under a court order to secure satisfaction of a judgment yet to be rendered, must do due process

writ of execution: A writ that puts in force a court’s decree or judgment ( has them seize it if in county)

Garnishment: A legal process whereby a creditor appropriates a debtor’s property or wages that are in the hands of a third party

Liquidated debts: definite, or fixed, in amount

creditors’ composition agreement: An agreement formed between a debtor and the creditors in which the creditors agree to accept a lesser sum than that is owed by the debtor in full satisfaction of the debt

Suretyship: An express contract in which a third party (the surety) promises to be primarily responsible for a debtor’s obligation to a creditor

Surety: A third party who agrees to be primarily responsible for the debt of another, creditor need not exhaust all legal remedies against the principal debtor before holding the surety responsible for payment

Guarantor: A person who agrees to satisfy the debt of another (the debtor) only after the principal debtor defaults, required to pay the obligation only after the principal debtor defaults, and usually only after the creditor has made an attempt to collect from the debtor

Releases from suretyship: Material modification, Surrender of property, Payment or tender of payment

Defenses by surety: incapacity and bankruptcy, statute  of limitations, fraud

right of subrogation: The right of a surety or guarantor to stand in the place of (be substituted for) the creditor, giving the surety or guarantor the same legal rights against the debtor that the creditor had

right of reimbursement: The legal right of a person to be repaid or indemnified for costs, expenses, or losses incurred or expended on the behalf of another

Co-surety: A person who assumes liability jointly with another surety for the payment of an obligation

right of contribution: The right of a co-surety who pays more than her or his proportionate share on a debtor’s default to recover the excess paid from other co-sureties

homestead exemption: A law permitting a debtor to retain the family home, either in its entirety or up to a specified dollar amount, free from the claims of unsecured creditors or trustees in bankruptcy

Frequently exempt personal property: Household furniture, Clothing and certain personal possessions, vehicles for transportation, classified animals/livestock/pets, Equipment that the debtor uses in a business or trade, such as tools or professional instruments

Chapter 7: ordinary, or straight, bankruptcy, provides for liquidation proceedings (the selling of all nonexempt assets and the distribution of the proceeds to the debtor’s creditors).

Chapter 11: reorganizations, creditors and the debtor formulate a plan under which the debtor pays a portion of the debts and is discharged of the remainder, corporate debtors

Chapter 12: for family farmers and family fishermen

Chapter 13: for individuals, provide for the adjustment of debts by persons with regular incomes

Consumer-debtor: One whose debts result primarily from the purchase of goods for personal, family, or household use

Liquidation: The sale of the nonexempt assets of a debtor and the distribution of the funds received to the debtor’s creditors

bankruptcy trustee: A person who is appointed by a court or by creditors to manage a debtor’s funds during bankruptcy (collect and reduce to cash)

petition in bankruptcy: the document that is filed with a bankruptcy court to initiate bankruptcy proceedings

U.S. trustee: A government official who performs certain administrative tasks that a bankruptcy judge would otherwise have to perform

Means test: used to determine a debtor’s eligibility for Chapter 7, to keep higher-income people from abusing the bankruptcy process forcing them to use ch 13 instead, debtor’s average monthly income in recent months is compared with the median income in the geographic area in which the person lives

order for relief: A court’s grant of assistance to a debtor in bankruptcy that relieves the debtor of the immediate obligation to pay debts, trustee and creditors must be given notice of the order for relief by mail not more than twenty days after entry of the order

Involuntary action: debtor of twelve or more creditors three of which have unsecured claims totaling at least $16,750 or less than twelve just one petition

automatic stay: In bankruptcy proceedings, the suspension of almost all litigation and other action by creditors against the debtor or the debtor’s property

adequate protection doctrine: A doctrine that protects secured creditors from losing their security as a result of an automatic stay in a bankruptcy proceeding

powers of avoidance: enable the trustee to set aside (avoid) a sale or other transfer of the debtor’s property and take the property back for the debtor’s estate

Preference: In bankruptcy proceedings, a property transfer or payment made by the debtor that favors one creditor over others

recoverable preferential payment: an insolvent debtor must have transferred property, for a preexisting debt, within ninety days before filing

preferred creditor: In the context of bankruptcy, a creditor who receives a preferential transfer from a debtor

trustee may avoid fraudulent transfers or obligations if: they were made within two years prior to the filing of the petition or were made with actual intent to hinder, delay, or defraud a creditor

Creditors’ meeting: trustee calls a meeting of the creditors listed in the schedules filed by the debtor

Proof of claim: lists the creditor’s name and address, as well as the amount that the creditor asserts is owed to the creditor by the debtor

no-asset case: no proof of claims filed, no payment to unsecured creditors, most debts discharged 

reaffirmation agreement: An agreement between a debtor and a creditor in which the debtor voluntarily agrees to pay a debt dischargeable in bankruptcy

Workout: An out-of-court agreement between a debtor and creditors that establishes a payment plan for discharging the debtor’s debts

debtor in possession (DIP): In Chapter 11 bankruptcy proceedings, a debtor who is allowed to continue in possession of the business and to continue business operations

cram-down provision: A provision of the Bankruptcy Code that allows a court to confirm a debtor’s Chapter 11 reorganization plan even though only one class of creditors has accepted it

family farmer: one whose gross income is at least 50 percent farm dependent and whose debts are at least 50 percent farm related, < 10,000,000 in debt

family farmer: one whose gross income is at least 50 percent farm dependent and whose debts are at least 50 percent farm related, < 2,044,225

• Secure

• Main security interest in house with lien: 

• House could depreciate, first need an appraisal

• Up to 70%, 80%, 90% of the property

• Banks in 09 crisis were loaning 100% loan to value ratios

•  Liens:

  • Artisans

  • Mechanics 

    • Real estate

    • On real property for the provision of supplies or work on real property

• Make sure sub contractor gets paid when you pay contractor

• Guarantor: needs to go after primary party first

• surety: principle responsible, can just go for first 

• TYPES OF BANKRUPTCY

  • Ch 7

    • liquidation

  • Ch 11

    • Businesses mostly, reorganization, plan to pay off 

    • Organizing classes

    • One class of creditors needs to approve in order for court to approve

      • Each secured creditor in a diff class, gerrymandered 

  • Ch 13

• After crossed off -> discharge

• 30 days after bankruptcy, put lien on house

• Automatic stay: creditors cannot take any action against the creditor during the automatic stay period, damages/punitive/actual/attorney fees

  • Can petition court for relief

• Color Tile: 

• Preference payment: look back period, 90 days, can’t give all money to one creditor and then declare bankruptcy

• Amanda is drunk signing a loan

  • She can get out

  • Bank? Can or can’t

• Principal guarantor, 

  • Assert all defenses EXCEPT certain personal defenses 

  • Incapacity of principal 

  • Only assuritys 

• Ex. irene and sharon at the bar, 

  • Makes loan to drunk person

  • Irene makes guarantee

  • Can’t say sharon was drunk so doesn’t count

• Personal to principal obligor 

• Fraud

  • Only fraud in securing the guarantee 

  • Make misrepresentations to either party

  • That caused guarantee to come together

  • Go after principal first

• Ways that you declare bankruptcy!!

  • Need to know

  • Ch 7

    • liquidation , just like winding up partnership, everything sold, business closes up, remaining debts are discharged (except for non dischargeable like income taxes)

    • The way you tell the court what you have is by filing schedules FIRST THING

    • Dw about formula for qualifying; it’s not automatic/a right

    • Can force bankruptcy (anyone not just secure)

    • Automatic stay: protection goes into effect exists until creditor asks for to be lifted or court lifts it, can’t sue/foreclose etc

      • Know general exceptions like divorce

    • Bankruptcy trustee: helps administer estate

    • Some things are exempt up to a certain extent, like garnishes, can’t take 100%

    • Different classes of creditors

    • TAXES are non dischargeable

    • Any misdeeds -> judge can throw out

  • Ch 11

    • REORGANIZATION

    • Ex. Spirit airlines

    • Still runs during ch 11

    • Come up with plan, creditors come together, ex leans on airplanes

  • Ch 13

    • Individuals

    • Regular income, certain levels of secure debt and insecure debt

    • Quicker and less expensive

    • LITIGATION INSIDE OF A BANKRUPTCY CASE; OFTEN TO RECOVER MONEY TO BE DISTRIBUTED TO CREDITORS

  • Ch 12 is just farmers and fisherman

• The way you tell the court what you have is by filing schedules FIRST THING

• LITIGATION INSIDE OF A BANKRUPTCY CASE; OFTEN TO RECOVER MONEY TO BE DISTRIBUTED TO CREDITORS

• Can’t pay creditors you like more first and then declare