2.  Liens: encumbrance (claim upon) on property to satisfy a debt, or protect a claim for the payment of debt.  Mechanic’s Liens: security for labor, materials, or service on real estate.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2

3.  Liens (continued).  Artisan’s Liens: labor and materials on personal property.  Judicial Liens: arises out of a court decision.  Writ of Attachment.  Writ of Execution. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3

4.  Permits a creditor to collect a debt by seizing property of the debtor held by a third party (garnishee).  Typically the garnishee is the debtor’s employer.  Garnishment Proceedings governed by state law.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4

5.  Garnishment (cont’d).  Laws Limiting the Amount of Wages Subject to Garnishment. Both federal and state laws limit the amount that can be taken out of a debtor’s take home pay. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5

6.  Creditors take less than owed on a liquidated debt.  Binding on those who agree because consideration given by each depending on one another. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6

7.  Suretyship: Promise by a third person to be primarily liable for the debtor’s obligation to the creditor.  Express contract between surety and the creditor.  Creditor can demand payment from surety at any time after debt is due.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7

8.  Suretyship: (cont’d).  Creditor need not exhaust all legal remedies against the debtor before holding the surety responsible.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8

9.  Guaranty: third person making the guaranty is secondarily liable.  Guarantor is liable only after the principal debtor defaults.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9

10. 10

11.  Guaranty: (continued).  Statute of Frauds requires guaranty to be in writing, unless main purpose exception applies.  CASE 15.1 Overseas Private Investment Corp. v. Kim (2010). Can a guarantor claim ignorance to excuse her from liability? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11

12.  Actions Releasing Surety and Guarantor: same as those that will discharge the guarantor.  Defenses: Surety can use any of the principal debtor’s defenses EXCEPT incapacity, bankruptcy, or statute of limitations.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12

13.  Defenses: (continued).  Surety can use his own defenses, EXCEPT fraud between debtor and surety that is unknown by creditor.  Material contract modification between debtor and creditor will release a gratuitous surety and a compensated surety to the extent he suffers a loss.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13

14.  Defenses: (continued).  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. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14

15.  Right of Subrogation.  Right of Reimbursement.  Right of Contribution.  Sureties in equal amounts.  Sureties in equal amounts, one or more co-sureties missing or insolvent. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15

16.  Exempted Real Property.  Homestead: state laws permit entirely or up to a certain dollar amount.  Exempted Personal Property.  Household furniture up to certain limit.  Clothing and personal possessions.  Vehicle for transportation.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16

17.  Exempted Personal Property (cont’d).  Certain classified animals.  Equipment debtor uses in a trade or business, up to certain dollar amount. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17

18.  Goals of Bankruptcy Law.  Bankruptcy Courts.  Types of Bankruptcy Relief: Chapter 7, Chapter 11, Chapter 12 and Chapter 13 for individuals.   Special Requirements for Consumer-Debtors. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18

19.  Chapter 7 – liquidation.  Chapter 11 – reorganizations.  Chapter 12 - adjustment of debts of family farmers and fishermen with regular incomes.  Chapter 13 - adjustment of debts of individuals with regular incomes. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19

20.  Chapter 7: ordinary or straight bankruptcy.  Debtor turns all assets over to the bankruptcy trustee.  Trustee sells nonexempt property and distributes the proceeds to the creditors. Remaining debts are discharged. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20

21.  Available for any person, individual, corporation, or partnership.  But - railroads, insurance companies, banks, savings and loan and investment companies licensed by the SBA, and credit unions cannot be debtors. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21

22.  Straight bankruptcy is commenced by the filing of a voluntary or involuntary petition in bankruptcy with the bankruptcy court.  If a debtor files the petition, it is voluntary.   If creditors file a petition, it is involuntary.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22

23.  Prior to filing, debtor(s) must receive credit counseling within 180 days of filing, and submit certificate.  Debtor must confirm accuracy of contents; attorney must file affidavit informing debtor about other chapters. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23

24.  Chapter 7 Schedules: 1. A list of both secured and unsecured creditors, their addresses, and the amount of debt owed to each. 2. A statement of the financial affairs of the debtor. 3. A list of all property owned by the debtor, including property claimed by the debtor to be exempt.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24

25.  Chapter 7 Schedules (cont’d): 4. A listing of current income and expenses. 5. A certificate of credit counseling (as discussed previously). 6. Proof of payments received from employers within sixty days prior to the filing of the petition.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25

26.  Chapter 7 Schedules (cont’d): 7. A statement of the amount of monthly income, itemized to show how the amount is calculated. 8. A copy of the debtor’s federal income tax return for the most recent year ending immediately before the filing of the petition.  Tax Returns During Bankruptcy. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26

27.  Determines whether debtor’s petition will be dismissed under Chapter 7.  Basic Formula: debtor’s average monthly income is compared to median income in area where he lives. If below median income, no presumption of abuse.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27

28.  Determines whether debtor’s petition is eligible for Chapter 7. If not, will be dismissed.  Basic Formula: debtor’s average monthly income is compared to median income in area where he lives. If below median income, no presumption of abuse.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28

29.  Means Test (cont’d).  Applying the Means Test to Future Disposable Income: if debtor’s income is above the median income, then further calculations are necessary, including calculations of disposable income.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29

30. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30

31.  Additional Grounds for Dismissal.  Conviction of violent crime or drug- trafficking.  Debtor fails to pay post-petition domestic-support obligations.  Order for Relief.  If filing is proper, filing itself is an order for relief. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31

32.  Creditors force debtor into bankruptcy.  If there are 12 or more creditors, need three or more with unsecured claims totaling at least $14,425 to join in petition. If less than 3 creditors, one or more creditors with $14,425 debt may file. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32

33.  Debtor can challenge involuntary bankruptcy but court will enter an order for relief if:  Debtor is not paying debts as they come due, OR  The debtor was in receivership for the 120 days before filing the petition. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33

34.  Penalties for frivolous petitions against debtors, including Punitive damages.  If court dismisses involuntary petition, creditors may be required to pay fees and costs, and in some cases, punitive damages. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34

35.  The moment a petition is properly filed, an automatic stay is granted protecting debtor from all creditors.  Creditors cannot commence or continue most legal actions.  Damages for knowing violation of stay.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 35

36.  CASE 15.2 In re Kuehn (2009). Did the university violate the automatic stay be refusing to provide a transcript?  Adequate Protection Doctrine: protects secured creditors from losing their security interest due to the automatic stay.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 36

37.  Exceptions to the Automatic Stay.  Domestic Support Obligations.  Proceedings against Debtor related to divorce, support, custody, and maintenance.  Investigations by securities regulatory agency. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 37

38.  Limitations on the Automatic Stay.  Secured party can petition bankruptcy court for relief from automatic stay. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 38

39.  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. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 39

40.  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. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 40

41.  Appointed by Court: duties include collecting assets and paying creditors in order of priority.  Duties for Means Testing: to determine whether there is substantial abuse. Must file statement within 10 days after 1 st meeting with creditors. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 41

42.  Trustee’s Powers: has right to ‘strong arm’ creditors return debtor’s property to trustee.  Has “Avoidance Powers” to set aside certain transfers:  Voidable Rights.   Preferences.   Fraudulent Transfers.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 42

43.  Trustee can stand in shoes of debtor and assert any lack of capacity or lack of assent. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 43

44.  Debtor 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 payment, debtor must be insolvent and transferred property for preexisting debt within previous 90 days. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 44

45.  Preferences to Insiders: avoidance power of Trustee extends to transfers made within ONE YEAR before filing.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 45

46.  What Constitutes a Preference? Transfers That Do NOT Constitute Preferences: payments for services within 15 days, payments made in ordinary course of business, and generally debts that are not preexisting. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 46

47.  Trustee may avoid fraudulent transfers if made : (1) within two years of filing of petition, or (2) with actual intent to hinder, delay or defraud a creditor. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 47

48. 1.Up to $21,625 in equity in the debtor’s residence and burial plot (the homestead exemption). 2. Interest in a motor vehicle up to $3,450. 3.Interest, up to $550 for a particular item, in household goods and personal effects (up to $11,525).  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 48

49. 4.Interest in jewelry up to $1,450. 5.Interest in any other property up to $1,150, plus any unused part of the $21,625 homestead exemption up to $10,825. 6.Interest in any tools up to $2,175. 7.A life insurance contract owned by the debtor.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 49

50. 8.Certain interests in accrued dividends and interest not to exceed $11,525. 9.Professionally prescribed health aids. 10.Social Security and other benefits. 11.The right to receive certain personal-injury and other awards up to $21,625. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 50

51.  2005 Bankruptcy Reform Act:  Places limits on the amounts of home equity debtors can shield from creditors.  Debtor must have lived in state two years prior to filing.  Maximum equity: $146,450, if within previous 3.5 years of filing. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 51

52.  Creditors’ Meeting: Trustee calls meeting of creditors, to examine debtor under oath.  Creditors’ Claims: to receive a portion of debtor’s estate, each creditor must file a proof of claim. Necessary if there is any dispute. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 52

53.  Debtor must file a statement of intention regarding secured collateral.  Distribution to Secured Creditors.  Distribution to Unsecured Creditors: paid in the order of their priority (see page 346). If any amount is left over, it is returned to debtor. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 53

54. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 54

55.  Exceptions to Discharge: discharge of a debt may be denied (see pages 346-347).  Objections to Discharge: court may deny claims based on debtor’s conduct.  Effect of Discharge: voids, or sets aside any judgment and prohibits any collector action.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 55

56.  Debtor agrees to pay a debt in bankruptcy by executing a reaffirmation agreement.  Reaffirmation Process: before discharge.  Reaffirmation Disclosures. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 56

57.  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.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 57

58.  “Fast Track” Chapter 11 for small business debtors whose liabilities do not exceed $2 million and who do not own or manage real estate.  Workouts.  Focus is on the Best Interests of the Creditors.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 58

59.  Debtor in Possession (DIP): business operates under court supervision.  DIP has same powers as trustee.  But court may appoint trustee (receiver) with ‘strong arm’ powers.  Creditors Committees.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 59

60.  Plan must be fair and equitable to all parties.  Filing the Plan: within 120 days after date relief order.  Acceptance and Confirmation of the Plan.  Discharge. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 60

61.  Chapter 13: Individuals’ Repayment Plans. Not for partnerships, corporations.  For individuals with regular income who owe fixed unsecured debts of <$360,475 or fixed secured debts of <1,081,400.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 61

62.  Chapter 13 (continued).  Filing the Petition: within 120 days after order of relief.  Good Faith and Plan Provisions:  Turn over future earnings to Trustee.  Full Payment of priority claims.  Identical treatment of claims within a class. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 62

63.  Confirmation of the Plan: court may refuse to accept or accept with “cram down.”  Discharge: after debtor has completed all payments, court grants discharge.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 63

64.  CASE 15.3 United States Aid Funds, Inc. v. Espinosa (2010). Why didn’t the court hold that Espinosa’s plan was ‘void’? © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 64

65.  Family Farmers and Fishermen.  Definitions: “Family Farmer”: 50% of gross income comes from farming and whose debts are 80% farm related.  Family Fisherman means 50% of gross income dependent on commercial fishing operations.  © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 65

66.  Filing the Petition: similar to process under Chapter 13.  Content and Confirmation of the Plan:  Confirmed or denied within 45 days of filing, same as repayment plan.  Unsecured creditors. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 66