© 2004 West Legal Studies in Business A Division of Thomson Learning 1 Chapter 15 Creditor-Debtor Relations and Bankruptcy

© 2004 West Legal Studies in Business A Division of Thomson Learning 2 §1: Laws Assisting Creditors Liens: Liens:  Consensual.  Statutory.  Judicial. Other Remedies: composition agreements, ABC’s. Other Remedies: composition agreements, ABC’s. Suretyship. Suretyship. Liens: Liens:  Consensual.  Statutory.  Judicial. Other Remedies: composition agreements, ABC’s. Other Remedies: composition agreements, ABC’s. Suretyship. Suretyship.

© 2004 West Legal Studies in Business A Division of Thomson Learning 3 Liens [1] Consensual Liens. Consensual Liens.  Personal property as collateral (UCC Art. 9 UCC Secured Transactions).  Real property as collateral (Mortgage). Mechanic’s Lien: Non-possessory lien on real estate for labor/services. Mechanic’s Lien: Non-possessory lien on real estate for labor/services.  Case 15.1: AEG Holdings LLC v. Tri-Gems Builders Inc. (2002). Consensual Liens. Consensual Liens.  Personal property as collateral (UCC Art. 9 UCC Secured Transactions).  Real property as collateral (Mortgage). Mechanic’s Lien: Non-possessory lien on real estate for labor/services. Mechanic’s Lien: Non-possessory lien on real estate for labor/services.  Case 15.1: AEG Holdings LLC v. Tri-Gems Builders Inc. (2002).

© 2004 West Legal Studies in Business A Division of Thomson Learning 4 Liens [2] Artisans’ Lien: Possessory lien on personal property for labor done to property. Artisans’ Lien: Possessory lien on personal property for labor done to property. Innkeeper’s Lien: Possessory lien on baggage for unpaid hotel charges. Innkeeper’s Lien: Possessory lien on baggage for unpaid hotel charges. Judicial Liens: Court-ordered seizure/sale of property. Judicial Liens: Court-ordered seizure/sale of property. Artisans’ Lien: Possessory lien on personal property for labor done to property. Artisans’ Lien: Possessory lien on personal property for labor done to property. Innkeeper’s Lien: Possessory lien on baggage for unpaid hotel charges. Innkeeper’s Lien: Possessory lien on baggage for unpaid hotel charges. Judicial Liens: Court-ordered seizure/sale of property. Judicial Liens: Court-ordered seizure/sale of property.

© 2004 West Legal Studies in Business A Division of Thomson Learning 5 GarnishmentGarnishment Permits a creditor to collect a debt by seizing property of the debtor held by a third party (garnishee). Permits a creditor to collect a debt by seizing property of the debtor held by a third party (garnishee). Proceedings governed by state law (Texas does not permit garnishment except for child support). Proceedings governed by state law (Texas does not permit garnishment except for child support). Laws Limit Amount of Wages. Laws Limit Amount of Wages.  Case 15.2: Shanks v. Lowe (2001). Permits a creditor to collect a debt by seizing property of the debtor held by a third party (garnishee). Permits a creditor to collect a debt by seizing property of the debtor held by a third party (garnishee). Proceedings governed by state law (Texas does not permit garnishment except for child support). Proceedings governed by state law (Texas does not permit garnishment except for child support). Laws Limit Amount of Wages. Laws Limit Amount of Wages.  Case 15.2: Shanks v. Lowe (2001).

© 2004 West Legal Studies in Business A Division of Thomson Learning 6 Mortgage Foreclosure [1] Mortgagor (Debtor-Borrower). Mortgagor (Debtor-Borrower). Mortgagee (Creditor-Lender). Mortgagee (Creditor-Lender). Debtor Defaults: Foreclosure - go through court to have sheriff seize, advertise, and sell property. Debtor Defaults: Foreclosure - go through court to have sheriff seize, advertise, and sell property. Mortgagor (Debtor-Borrower). Mortgagor (Debtor-Borrower). Mortgagee (Creditor-Lender). Mortgagee (Creditor-Lender). Debtor Defaults: Foreclosure - go through court to have sheriff seize, advertise, and sell property. Debtor Defaults: Foreclosure - go through court to have sheriff seize, advertise, and sell property.

© 2004 West Legal Studies in Business A Division of Thomson Learning 7 Mortgage Foreclosure [2] Money goes to expenses of sale, creditors in descending order of priority, then debtor if any left. Money goes to expenses of sale, creditors in descending order of priority, then debtor if any left. If there is still money owed to creditor after foreclosure there is a deficiency, and the debtor is still liable for this. If there is still money owed to creditor after foreclosure there is a deficiency, and the debtor is still liable for this. Equity of redemption within statutory period of redemption by the debtor. Equity of redemption within statutory period of redemption by the debtor. Money goes to expenses of sale, creditors in descending order of priority, then debtor if any left. Money goes to expenses of sale, creditors in descending order of priority, then debtor if any left. If there is still money owed to creditor after foreclosure there is a deficiency, and the debtor is still liable for this. If there is still money owed to creditor after foreclosure there is a deficiency, and the debtor is still liable for this. Equity of redemption within statutory period of redemption by the debtor. Equity of redemption within statutory period of redemption by the debtor.

© 2004 West Legal Studies in Business A Division of Thomson Learning 8 §2: Suretyship and Guaranty Promise by a third person (Surety/ Guarantor) to pay the Creditor a debt owed by Debtor in the event the Debtor does not pay. Principal Debtor Principal Debtor Creditor Surety / Guarantor Surety / Guarantor

© 2004 West Legal Studies in Business A Division of Thomson Learning 9 SuretyshipSuretyship Express contract between the surety and the creditor. Express contract between the surety and the creditor. Creditor can demand payment from surety at any time after debt is due. Creditor can demand payment from surety at any time after debt is due. Creditor need not exhaust all legal remedies against the debtor before holding the surety responsible. Creditor need not exhaust all legal remedies against the debtor before holding the surety responsible. Express contract between the surety and the creditor. Express contract between the surety and the creditor. Creditor can demand payment from surety at any time after debt is due. Creditor can demand payment from surety at any time after debt is due. Creditor need not exhaust all legal remedies against the debtor before holding the surety responsible. Creditor need not exhaust all legal remedies against the debtor before holding the surety responsible.

© 2004 West Legal Studies in Business A Division of Thomson Learning 10 GuarantyGuaranty Secondarily liable, debtor must default, creditor has attempted to collect from the debtor. Secondarily liable, debtor must default, creditor has attempted to collect from the debtor. Statute of Frauds requires guaranty to be in writing. Statute of Frauds requires guaranty to be in writing. Suretyship vs. Guaranty. Suretyship vs. Guaranty.  Surety is primarily liable for debtor’s obligation.  Guarantor is secondarily liable. Secondarily liable, debtor must default, creditor has attempted to collect from the debtor. Secondarily liable, debtor must default, creditor has attempted to collect from the debtor. Statute of Frauds requires guaranty to be in writing. Statute of Frauds requires guaranty to be in writing. Suretyship vs. Guaranty. Suretyship vs. Guaranty.  Surety is primarily liable for debtor’s obligation.  Guarantor is secondarily liable.

© 2004 West Legal Studies in Business A Division of Thomson Learning 11 Defenses of Surety & Guarantor Surety can use any of the Debtor’s defenses EXCEPT incapacity, bankruptcy, or statute of limitations. Surety can use any of the Debtor’s defenses EXCEPT incapacity, bankruptcy, or statute of limitations. Surety can use his own defenses, EXCEPT fraud between Debtor and Surety that is unknown by creditor. Surety can use his own defenses, EXCEPT fraud between Debtor and Surety that is unknown by creditor. Surety can use any of the Debtor’s defenses EXCEPT incapacity, bankruptcy, or statute of limitations. Surety can use any of the Debtor’s defenses EXCEPT incapacity, bankruptcy, or statute of limitations. Surety can use his own defenses, EXCEPT fraud between Debtor and Surety that is unknown by creditor. Surety can use his own defenses, EXCEPT fraud between Debtor and Surety that is unknown by creditor.

© 2004 West Legal Studies in Business A Division of Thomson Learning 12 Defenses of Surety & Guarantor Material contract modification between Debtor and Creditor will release a gratuitous surety and a compensated surety to the extent he suffers a loss. Material contract modification between Debtor and Creditor will release a gratuitous surety and a compensated surety to the extent he suffers a loss. Surrender or impairment of the Debtor’s collateral releases surety to the extent he is damaged. Surrender or impairment of the Debtor’s collateral releases surety to the extent he is damaged. Release of a co-surety releases surety to the extent he is damaged. Release of a co-surety releases surety to the extent he is damaged. Material contract modification between Debtor and Creditor will release a gratuitous surety and a compensated surety to the extent he suffers a loss. Material contract modification between Debtor and Creditor will release a gratuitous surety and a compensated surety to the extent he suffers a loss. Surrender or impairment of the Debtor’s collateral releases surety to the extent he is damaged. Surrender or impairment of the Debtor’s collateral releases surety to the extent he is damaged. Release of a co-surety releases surety to the extent he is damaged. Release of a co-surety releases surety to the extent he is damaged.

© 2004 West Legal Studies in Business A Division of Thomson Learning 13 Rights of Surety & Guarantor Right of Subrogation. Right of Subrogation. Right of Reimbursement. Right of Reimbursement. Right of Contribution from Co-sureties. Right of Contribution from Co-sureties.  Sureties in equal amounts.  Sureties in equal amounts, one or more co-sureties missing or insolvent. Right of Subrogation. Right of Subrogation. Right of Reimbursement. Right of Reimbursement. Right of Contribution from Co-sureties. Right of Contribution from Co-sureties.  Sureties in equal amounts.  Sureties in equal amounts, one or more co-sureties missing or insolvent.

© 2004 West Legal Studies in Business A Division of Thomson Learning 14 §3: Protection for Debtors Exemptions (Federal and State). Exemptions (Federal and State).  Homestead.  Personal property. Holder in Due Course does not work against consumers. Holder in Due Course does not work against consumers. Truth-in-Lending Act for consumers. Truth-in-Lending Act for consumers. Federal Trade Commission rule. Federal Trade Commission rule. Exemptions (Federal and State). Exemptions (Federal and State).  Homestead.  Personal property. Holder in Due Course does not work against consumers. Holder in Due Course does not work against consumers. Truth-in-Lending Act for consumers. Truth-in-Lending Act for consumers. Federal Trade Commission rule. Federal Trade Commission rule.

© 2004 West Legal Studies in Business A Division of Thomson Learning 15 §4: Bankruptcy and Reorganization Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. Secured vs. Unsecured Creditors. Secured vs. Unsecured Creditors.  Secured: holds a security interest in property that serves as collateral for debt.  Unsecured does not have a security interest in collateral. Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. Secured vs. Unsecured Creditors. Secured vs. Unsecured Creditors.  Secured: holds a security interest in property that serves as collateral for debt.  Unsecured does not have a security interest in collateral.

© 2004 West Legal Studies in Business A Division of Thomson Learning 16 Types of Bankruptcy Relief Bankruptcy code has 8 chapters. Bankruptcy code has 8 chapters. 1,3, 5 - general definitional provisions and provisions covering administration, creditors, debtor and estate. 1,3, 5 - general definitional provisions and provisions covering administration, creditors, debtor and estate. Chapter 7 - liquidation proceedings. Chapter 7 - liquidation proceedings. Chapter 9 - adjustment of debts of a municipality. Chapter 9 - adjustment of debts of a municipality. Bankruptcy code has 8 chapters. Bankruptcy code has 8 chapters. 1,3, 5 - general definitional provisions and provisions covering administration, creditors, debtor and estate. 1,3, 5 - general definitional provisions and provisions covering administration, creditors, debtor and estate. Chapter 7 - liquidation proceedings. Chapter 7 - liquidation proceedings. Chapter 9 - adjustment of debts of a municipality. Chapter 9 - adjustment of debts of a municipality.

© 2004 West Legal Studies in Business A Division of Thomson Learning 17 Types of Bankruptcy Relief Chapter 11 – reorganizations. Chapter 11 – reorganizations. Chapter 12 - adjustment of debts of family farmers with regular incomes. Chapter 12 - adjustment of debts of family farmers with regular incomes. Chapter 13 - adjustment of debts of individuals with regular incomes. Chapter 13 - adjustment of debts of individuals with regular incomes. Chapter 11 – reorganizations. Chapter 11 – reorganizations. Chapter 12 - adjustment of debts of family farmers with regular incomes. Chapter 12 - adjustment of debts of family farmers with regular incomes. Chapter 13 - adjustment of debts of individuals with regular incomes. Chapter 13 - adjustment of debts of individuals with regular incomes.

© 2004 West Legal Studies in Business A Division of Thomson Learning 18 Chapter 7 Liquidation Chapter 7: Ordinary or straight bankruptcy. All assets are turned over to a trustee. Chapter 7: Ordinary or straight bankruptcy. All assets are turned over to a trustee. Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged. Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged. Chapter 7: Ordinary or straight bankruptcy. All assets are turned over to a trustee. Chapter 7: Ordinary or straight bankruptcy. All assets are turned over to a trustee. Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged. Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged.

© 2004 West Legal Studies in Business A Division of Thomson Learning 19 LiquidationLiquidation Available for any person, individual, corporation, partnership. Available for any person, individual, corporation, partnership. Railroads, insurance companies, banks, savings and loan and investment companies licensed by the SBA, and credit unions cannot be debtors. Railroads, insurance companies, banks, savings and loan and investment companies licensed by the SBA, and credit unions cannot be debtors. Available for any person, individual, corporation, partnership. Available for any person, individual, corporation, partnership. Railroads, insurance companies, banks, savings and loan and investment companies licensed by the SBA, and credit unions cannot be debtors. Railroads, insurance companies, banks, savings and loan and investment companies licensed by the SBA, and credit unions cannot be debtors.

© 2004 West Legal Studies in Business A Division of Thomson Learning 20 Filing the Petition Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court. Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court. Voluntary vs. Involuntary bankruptcy. Voluntary vs. Involuntary bankruptcy. Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court. Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court. Voluntary vs. Involuntary bankruptcy. Voluntary vs. Involuntary bankruptcy.

© 2004 West Legal Studies in Business A Division of Thomson Learning 21 Voluntary Bankruptcy Petitioner must understand there are other chapters available. Petitioner must understand there are other chapters available. Debtor does not have to be insolvent. Debtor does not have to be insolvent. List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses. List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses. Swear to these and sign. Federal crime to misrepresent. Swear to these and sign. Federal crime to misrepresent. Petitioner must understand there are other chapters available. Petitioner must understand there are other chapters available. Debtor does not have to be insolvent. Debtor does not have to be insolvent. List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses. List secured and unsecured creditors and addresses and amount of money owed. List of all property owned including property claimed; current income and expenses. Swear to these and sign. Federal crime to misrepresent. Swear to these and sign. Federal crime to misrepresent.

© 2004 West Legal Studies in Business A Division of Thomson Learning 22 Voluntary Bankruptcy Court issues order of relief. Court issues order of relief. Clerk of court gives trustee and Creditors mailed notice of the order within 20 days. Clerk of court gives trustee and Creditors mailed notice of the order within 20 days. Court will deny if “substantial abuse” of Chapter 7. Court will deny if “substantial abuse” of Chapter 7. Case 15.3: In Re Lamanna (1998). Case 15.3: In Re Lamanna (1998). Court issues order of relief. Court issues order of relief. Clerk of court gives trustee and Creditors mailed notice of the order within 20 days. Clerk of court gives trustee and Creditors mailed notice of the order within 20 days. Court will deny if “substantial abuse” of Chapter 7. Court will deny if “substantial abuse” of Chapter 7. Case 15.3: In Re Lamanna (1998). Case 15.3: In Re Lamanna (1998).

© 2004 West Legal Studies in Business A Division of Thomson Learning 23 Involuntary Bankruptcy Creditors force Debtor into bankruptcy proceedings. (Not against a farmer, charitable institution). Creditors force Debtor into bankruptcy proceedings. (Not against a farmer, charitable institution). If there are 12 or more creditors, need three or more with unsecured claims totaling at least $10,000 to join in petition. If there are 12 or more creditors, need three or more with unsecured claims totaling at least $10,000 to join in petition. Creditors force Debtor into bankruptcy proceedings. (Not against a farmer, charitable institution). Creditors force Debtor into bankruptcy proceedings. (Not against a farmer, charitable institution). If there are 12 or more creditors, need three or more with unsecured claims totaling at least $10,000 to join in petition. If there are 12 or more creditors, need three or more with unsecured claims totaling at least $10,000 to join in petition.

© 2004 West Legal Studies in Business A Division of Thomson Learning 24 Involuntary Bankruptcy If there are less than 12 creditors, one or more having a claim of $10,000 may file. If there are less than 12 creditors, one or more having a claim of $10,000 may file. Court will order relief if Debtor is generally not paying debts as they come due. Court will order relief if Debtor is generally not paying debts as they come due. If there are less than 12 creditors, one or more having a claim of $10,000 may file. If there are less than 12 creditors, one or more having a claim of $10,000 may file. Court will order relief if Debtor is generally not paying debts as they come due. Court will order relief if Debtor is generally not paying debts as they come due.

© 2004 West Legal Studies in Business A Division of Thomson Learning 25 Involuntary Bankruptcy Involuntary Bankruptcy Court will order relief if: Court will order relief if:  A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of debtor’s property within 120 days before filing. Penalties for frivolous petitions against debtors, including Punitive damages. Penalties for frivolous petitions against debtors, including Punitive damages. Court will order relief if: Court will order relief if:  A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of debtor’s property within 120 days before filing. Penalties for frivolous petitions against debtors, including Punitive damages. Penalties for frivolous petitions against debtors, including Punitive damages.

© 2004 West Legal Studies in Business A Division of Thomson Learning 26 Automatic Stay Either voluntary or involuntary. Either voluntary or involuntary. Creditors cannot commence or continue most legal actions. Creditors cannot commence or continue most legal actions. Damages for violation of stay. Damages for violation of stay. Creditors can get “adequate protection.” Creditors can get “adequate protection.”  Periodic or one time cash payments or indubitable equivalent. Either voluntary or involuntary. Either voluntary or involuntary. Creditors cannot commence or continue most legal actions. Creditors cannot commence or continue most legal actions. Damages for violation of stay. Damages for violation of stay. Creditors can get “adequate protection.” Creditors can get “adequate protection.”  Periodic or one time cash payments or indubitable equivalent.

© 2004 West Legal Studies in Business A Division of Thomson Learning 27 Property of the Estate Debtor’s Estate includes: Debtor’s Estate includes:  All Debtor’s legal and equitable interests in property presently held, including community property;  Property transferred in a “voidable” transaction; and  Property which Debtor becomes entitled within 180 days after filing. Debtor’s Estate includes: Debtor’s Estate includes:  All Debtor’s legal and equitable interests in property presently held, including community property;  Property transferred in a “voidable” transaction; and  Property which Debtor becomes entitled within 180 days after filing.

© 2004 West Legal Studies in Business A Division of Thomson Learning 28 Property of the Estate Estate includes (cont’d): Estate includes (cont’d):  Proceeds and profits from the property of the estate.  After-acquired property such as inheritances, property settlements, and life insurance death proceeds. Estate includes (cont’d): Estate includes (cont’d):  Proceeds and profits from the property of the estate.  After-acquired property such as inheritances, property settlements, and life insurance death proceeds.

© 2004 West Legal Studies in Business A Division of Thomson Learning 29 Creditor’s Meeting and Claims Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets. Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets. Within 90 days, Creditors must file “proof of claim” with court clerk. Within 90 days, Creditors must file “proof of claim” with court clerk. Leases cannot be for more than one year. Leases cannot be for more than one year. Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets. Ten-thirty days after filing, Court calls meeting of creditors. Debtor is examined under oath about his debts and assets. Within 90 days, Creditors must file “proof of claim” with court clerk. Within 90 days, Creditors must file “proof of claim” with court clerk. Leases cannot be for more than one year. Leases cannot be for more than one year.

© 2004 West Legal Studies in Business A Division of Thomson Learning 30 Creditor’s Meeting and Claims Allowed unless disputed. Allowed unless disputed. If claim is disputed or unliquidated, court will decide value. If claim is disputed or unliquidated, court will decide value. It is a crime to file false claim. It is a crime to file false claim. Employment contracts and real estate. Employment contracts and real estate. Allowed unless disputed. Allowed unless disputed. If claim is disputed or unliquidated, court will decide value. If claim is disputed or unliquidated, court will decide value. It is a crime to file false claim. It is a crime to file false claim. Employment contracts and real estate. Employment contracts and real estate.

© 2004 West Legal Studies in Business A Division of Thomson Learning 31 ExemptionsExemptions See list in text, p See list in text, p States may pass law requiring Debtor use state exemptions. States may pass law requiring Debtor use state exemptions. In some states, Debtor may choose state or federal exemptions. In some states, Debtor may choose state or federal exemptions. See list in text, p See list in text, p States may pass law requiring Debtor use state exemptions. States may pass law requiring Debtor use state exemptions. In some states, Debtor may choose state or federal exemptions. In some states, Debtor may choose state or federal exemptions.

© 2004 West Legal Studies in Business A Division of Thomson Learning 32 The Trustee Court-appointed until first meeting of creditors. Court-appointed until first meeting of creditors. Creditors elect permanent trustee Creditors elect permanent trustee Administers estate. Administers estate. Collects proceeds, liquidates assets and pay Creditors in order of priority. Collects proceeds, liquidates assets and pay Creditors in order of priority. Court-appointed until first meeting of creditors. Court-appointed until first meeting of creditors. Creditors elect permanent trustee Creditors elect permanent trustee Administers estate. Administers estate. Collects proceeds, liquidates assets and pay Creditors in order of priority. Collects proceeds, liquidates assets and pay Creditors in order of priority.

© 2004 West Legal Studies in Business A Division of Thomson Learning 33 Trustee’s Powers Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of: Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of:  Debtor against the creditors.  Lien creditors against the creditors.  Bona fide purchaser against the creditors.  Trustee still loses to the pmsi creditor who perfects within his “magic” 10-day period. Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of: Trustee has rights to get Debtor’s property back from those Creditors that he can defeat by asserting the rights of:  Debtor against the creditors.  Lien creditors against the creditors.  Bona fide purchaser against the creditors.  Trustee still loses to the pmsi creditor who perfects within his “magic” 10-day period.

© 2004 West Legal Studies in Business A Division of Thomson Learning 34 Voidable Rights Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent. Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent.

© 2004 West Legal Studies in Business A Division of Thomson Learning 35 PreferencesPreferences A Debtor is not permitted to transfer property or make a payment that favors—or gives a preference to—one creditor over another. A Debtor is not permitted to transfer property or make a payment that favors—or gives a preference to—one creditor over another. For a Trustee to recover preferential payment, Debtor must be insolvent and transferred property for pre-existing debt within previous 90 days. For a Trustee to recover preferential payment, Debtor must be insolvent and transferred property for pre-existing debt within previous 90 days. A Debtor is not permitted to transfer property or make a payment that favors—or gives a preference to—one creditor over another. A Debtor is not permitted to transfer property or make a payment that favors—or gives a preference to—one creditor over another. For a Trustee to recover preferential payment, Debtor must be insolvent and transferred property for pre-existing debt within previous 90 days. For a Trustee to recover preferential payment, Debtor must be insolvent and transferred property for pre-existing debt within previous 90 days.

© 2004 West Legal Studies in Business A Division of Thomson Learning 36 PreferencesPreferences Trustee can use preferential payment to pay a real preexisting debt, not for current consideration. Trustee can use preferential payment to pay a real preexisting debt, not for current consideration. Creditor gets more than he would in a Chapter 7. Creditor gets more than he would in a Chapter 7. Consumer can transfer up to $600 without constituting a preference. Consumer can transfer up to $600 without constituting a preference. Trustee can use preferential payment to pay a real preexisting debt, not for current consideration. Trustee can use preferential payment to pay a real preexisting debt, not for current consideration. Creditor gets more than he would in a Chapter 7. Creditor gets more than he would in a Chapter 7. Consumer can transfer up to $600 without constituting a preference. Consumer can transfer up to $600 without constituting a preference.

© 2004 West Legal Studies in Business A Division of Thomson Learning 37 Liens on Debtor’s Property Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent. Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent. Can avoid liens which were unperfected on date of bankruptcy. Can avoid liens which were unperfected on date of bankruptcy. Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent. Trustee can avoid statutory liens that became effective when bankruptcy petition filed, or when debtor became insolvent. Can avoid liens which were unperfected on date of bankruptcy. Can avoid liens which were unperfected on date of bankruptcy.

© 2004 West Legal Studies in Business A Division of Thomson Learning 38 Fraudulent Transfers Trustee may avoid fraudulent transfers made within one year of filing of petition. Trustee may avoid fraudulent transfers made within one year of filing of petition. Trustee may proceed under state law for fraud with a 3 year statute of limitations. Trustee may proceed under state law for fraud with a 3 year statute of limitations. Trustee may avoid fraudulent transfers made within one year of filing of petition. Trustee may avoid fraudulent transfers made within one year of filing of petition. Trustee may proceed under state law for fraud with a 3 year statute of limitations. Trustee may proceed under state law for fraud with a 3 year statute of limitations.

© 2004 West Legal Studies in Business A Division of Thomson Learning 39 Distribution of Property If Secured property: If Secured property:  Consumer debtors. »Have 30 days from filing petition or before first meeting of creditors. »Debtor must tell what she intends to do with collateral-- keep or surrender. »Trustee must enforce within 45 days.  If surrenders: creditor can keep or sell. »If creditor keeps = full satisfaction of debt. »If creditor sells = can use extra for costs, or can become unsecured creditor for deficiency. If Secured property: If Secured property:  Consumer debtors. »Have 30 days from filing petition or before first meeting of creditors. »Debtor must tell what she intends to do with collateral-- keep or surrender. »Trustee must enforce within 45 days.  If surrenders: creditor can keep or sell. »If creditor keeps = full satisfaction of debt. »If creditor sells = can use extra for costs, or can become unsecured creditor for deficiency.

© 2004 West Legal Studies in Business A Division of Thomson Learning 40 Distribution of Property Unsecured property Unsecured property  Paid according to bankruptcy law.  All of one class must be paid before moving to next.  Creditor within last class receive proportionately if not enough.  See Priority List in text.  All creditors paid, trustee gives extra back to debtor. Unsecured property Unsecured property  Paid according to bankruptcy law.  All of one class must be paid before moving to next.  Creditor within last class receive proportionately if not enough.  See Priority List in text.  All creditors paid, trustee gives extra back to debtor.

© 2004 West Legal Studies in Business A Division of Thomson Learning 41 DischargeDischarge Exemptions. Exemptions.  Case 15.4: In Re Jercich (2001). Objections to Discharge. Objections to Discharge.  Case 15.5: In Re Ellison (2002). Effect of Discharge. Effect of Discharge. Revocation of Discharge. Revocation of Discharge. Reaffirmation of a Debt. Reaffirmation of a Debt. Exemptions. Exemptions.  Case 15.4: In Re Jercich (2001). Objections to Discharge. Objections to Discharge.  Case 15.5: In Re Ellison (2002). Effect of Discharge. Effect of Discharge. Revocation of Discharge. Revocation of Discharge. Reaffirmation of a Debt. Reaffirmation of a Debt.

© 2004 West Legal Studies in Business A Division of Thomson Learning 42 Exceptions to Discharge Claims for back taxes. Claims for back taxes. Claims for amounts borrowed by Debtor to pay federal taxes. Claims for amounts borrowed by Debtor to pay federal taxes. Claims against property/money obtained by Debtor under false pretenses. Claims against property/money obtained by Debtor under false pretenses. Claims by Creditors who did not know about bankruptcy. Claims by Creditors who did not know about bankruptcy. Claims for back taxes. Claims for back taxes. Claims for amounts borrowed by Debtor to pay federal taxes. Claims for amounts borrowed by Debtor to pay federal taxes. Claims against property/money obtained by Debtor under false pretenses. Claims against property/money obtained by Debtor under false pretenses. Claims by Creditors who did not know about bankruptcy. Claims by Creditors who did not know about bankruptcy.

© 2004 West Legal Studies in Business A Division of Thomson Learning 43 Reaffirmation of Debt Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy. Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy. Agreement is filed with court. Agreement is filed with court. Debtor can rescind agreement at any time. Debtor can rescind agreement at any time. Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy. Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy. Agreement is filed with court. Agreement is filed with court. Debtor can rescind agreement at any time. Debtor can rescind agreement at any time.

© 2004 West Legal Studies in Business A Division of Thomson Learning 44 § 6: Reorganizations Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest. Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest. Same debtors as are eligible under Chapter 7. Same debtors as are eligible under Chapter 7. Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest. Chapter 11—Corporations. Debtor and Creditors formulate a plan under which the Debtor pays a portion of its debts and is discharged of the rest. Same debtors as are eligible under Chapter 7. Same debtors as are eligible under Chapter 7.

© 2004 West Legal Studies in Business A Division of Thomson Learning 45 ReorganizationsReorganizations “Fast tract” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate. “Fast tract” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate. “Workouts”. “Workouts”. “Fast tract” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate. “Fast tract” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate. “Workouts”. “Workouts”.

© 2004 West Legal Studies in Business A Division of Thomson Learning 46 ReorganizationsReorganizations Debtor in Possession (DIP). Debtor in Possession (DIP).  Trustee may be appointed.  DIP has same powers as trustee in Chapter 7. »Strong-arm clause. Collective Bargaining Agreements. Collective Bargaining Agreements. Creditors Committees. Creditors Committees. Debtor in Possession (DIP). Debtor in Possession (DIP).  Trustee may be appointed.  DIP has same powers as trustee in Chapter 7. »Strong-arm clause. Collective Bargaining Agreements. Collective Bargaining Agreements. Creditors Committees. Creditors Committees.

© 2004 West Legal Studies in Business A Division of Thomson Learning 47 The Reorganization Plan Filing the Plan. Filing the Plan.  Within 120 days after date relief order.  Plan must be equitable. Acceptance and Confirmation of the Plan. Acceptance and Confirmation of the Plan. Discharge. Discharge. Filing the Plan. Filing the Plan.  Within 120 days after date relief order.  Plan must be equitable. Acceptance and Confirmation of the Plan. Acceptance and Confirmation of the Plan. Discharge. Discharge.

© 2004 West Legal Studies in Business A Division of Thomson Learning 48 §7: Individuals’ Repayment Plan Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$269,250 or fixed secured debts of <$807,750. Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$269,250 or fixed secured debts of <$807,750. Not for partnerships, corporations. Not for partnerships, corporations. Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$269,250 or fixed secured debts of <$807,750. Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$269,250 or fixed secured debts of <$807,750. Not for partnerships, corporations. Not for partnerships, corporations.

© 2004 West Legal Studies in Business A Division of Thomson Learning 49 Law on the Web U.S. Bankruptcy Code at Cornell U. U.S. Bankruptcy Code at Cornell U. U.S. Bankruptcy Code at Cornell U U.S. Bankruptcy Code at Cornell U Creditor-Debtor relationships at Cornell U. Creditor-Debtor relationships at Cornell U. Creditor-Debtor relationships Creditor-Debtor relationships The American Bankruptcy Institute. The American Bankruptcy Institute. The American Bankruptcy Institute The American Bankruptcy Institute Legal Research Exercises on the Web. Legal Research Exercises on the Web. Legal Research Exercises on the Web. Legal Research Exercises on the Web. U.S. Bankruptcy Code at Cornell U. U.S. Bankruptcy Code at Cornell U. U.S. Bankruptcy Code at Cornell U U.S. Bankruptcy Code at Cornell U Creditor-Debtor relationships at Cornell U. Creditor-Debtor relationships at Cornell U. Creditor-Debtor relationships Creditor-Debtor relationships The American Bankruptcy Institute. The American Bankruptcy Institute. The American Bankruptcy Institute The American Bankruptcy Institute Legal Research Exercises on the Web. Legal Research Exercises on the Web. Legal Research Exercises on the Web. Legal Research Exercises on the Web.