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9-2

9-3 Learning Objectives  Describe a Secured Transaction  Discuss the formation of a security interest  Identify the different types of collateral  Describe how a security interest is perfected  Discuss the characteristics of a surety  Explain the bankruptcy process  Discuss the types of bankruptcy  Describe the bankruptcy exemptions

9-4 Definition of terms  Secured transactions involve a debt to pay money that is backed by the debtor giving an interest in his or her property to a creditor as a means of securing the promise of repayment.  Security Interest  Bankruptcy involves a debtor who cannot afford to repay his or her debts having those debts legally discharged by the court.

9-5 Debtor - Creditor  C reditor : one who has given something of value to the debtor in exchange for a promise that the debtor will repay the creditor – usually collateral.  Collateral : the debtor’s property in which the debtor gives the creditor an interest. If the debt is not repaid, the creditor will take the property back.  Debtor is one who owes a debt to a creditor.

9-6 Governing law and types of Collateral  Financing secured transactions is covered by Article 9 of the UCC. Article 9 – personal property only  Collateral that is covered under Article 9 can be classified as  (1) goods  (2) indispensable paper  (3) intangibles

9-7 Attachment and Perfection Attachment Secured party gave something of value Debtor has rights to the collateral Perfection File Financing Statement signed by Debtor Secured party taking possession of collateral Collateral is in possession of secured party or written security agreement contains description of collateral and signed by debtor Automatically by Attachment PMSI Temporary Perfection

9-8 Priorities  When more than one party has an interest in the same collateral, UCC Article 9 establishes a set of rules that determines the relative priorities among these parties  Perfected vs. Unperfected Security Interest  First secured party to file or perfect has priority  Numerous exceptions vary by jurisdiction

9-9  Created by state statute to secure priority of payment for goods or services sold  Mechanic’s or Artisan’s lien  Repairer’s right to continue to hold on to the goods worked on or materials supplied until customer pays  can sell the property to fulfill payment of the debt  must give the debtor notice and an opportunity to pay  lien holder has priority over all other creditors Liens

9-10 Suretyship Person or company other than debtor that agrees to assume liability on the debt in case debtor defaults Surety Court decree that orders the debtor to pay the creditor, thereby releasing the surety of its obligation to pay Exoneration Right given to a surety that pays a debt for the debtor to collect from the debtor Reimbursement Right given to surety to step into the shoes of the creditor to collect against the debtor Subrogation Rights given to surety who pays creditor pro rata share from other sureties on the debt. Contribution

9-11 Bankruptcy  Governing law:  Article I, Sec. 8, U.S. Constitution  Bankruptcy Code enacted by Congress  Federal Rules of Bankruptcy Procedure  Rules within each district  Bankruptcy Court in each U.S. judicial district  Bankruptcy judges  Bankruptcy trustees  “341 Hearings”

9-12 Types of Bankruptcy  Goals:  Debtors get a “clean slate” through discharge in bankruptcy  Creditors are paid based on the orders of the bankruptcy court  Types of Bankruptcy  Voluntary  Involuntary  Bankruptcy Code is divided into chapters  Chapter 7 – Liquidation  Chapter 11 – Reorganization  Chapter 13 – Debt Adjustment

9-13 Discharge in Bankruptcy  Releases debtor from liability for certain types of debts  Exceptions:  Debts incurred due to a previous court order  Tax claims  Debts omitted by debtor when filing  Child support and Alimony  Educational loans  Permanent order prohibiting creditors from collecting discharged debts, including legal action and communications with the debtor, such as phone calls, letters, and personal contacts

9-14 Servicemembers’ Civil Relief Act  Applies to all active duty military and to citizens serving in the military  Three primary areas of coverage under the SCRA : (1) protection against the entry of default judgments; (2) stay of proceedings where the service member has notice of the proceeding; and (3) stay or vacation of execution of judgments, attachments, and garnishments.