Chapter 21 Creditors’ Rights and Bankruptcy

1. Chapter 21Creditors’ Rights and Bankruptcy

2. Learning Objectives • What is a prejudgment attachment? What is a writ of execution? How does a creditor use these remedies? • What is garnishment? When might a creditor undertake a garnishment proceeding? • In a bankruptcy proceeding, what constitutes the debtor’s estate in property? What property is exempt from the estate under federal bankruptcy law? • What is the difference between an exception to discharge and an objection to discharge? • In a Chapter 11 reorganization, what is the role of the debtor in possession?

3. Laws Assisting Creditors • Liens: • Mechanic’s Lien (real property). • Artisan’ Lien (personal property). • Innkeeper’s Lien (baggage of guests). • Judicial Lien: • Attachment: court-ordered seizure of property. • Writ of Execution: court-ordered sale. • Garnishment. • Creditor permitted to collect a debt by seizing property held by third party (usually wages held by debtor’s employer).

4. Laws Assisting Creditors • Mortgage Foreclosure. • Creditor (mortgagee) has the right to foreclose on property upon debtor’s (mortgagor) default. • Suretyship and Guaranty. • Third person promises to pay debt owed by another. • Surety (3rd person is primarily liable). • Guaranty (3rd person is secondarily liable). • CASE 21.1JSV, Inc. v. Hene Meat, Co. (2003).

5. Laws Assisting Debtors • Homestead Exemption. • Family home free from claims of unsecured creditors or trustees in bankruptcy. • Other Exemptions: • Household furniture. • Clothing and personal possessions. • Vehicle. • Tools of the trade. • Special Protection for Consumer-Debtors.

6. Bankruptcy and Reorganization • Article I, Section 8 of the U.S. Constitution. Federal jurisdiction. • Bankruptcy Reform Act of 1978, amended by Reform Act of 1994. • Federal court under U.S. district court, can appeal to district courts. • Federally appointed judges.

7. Bankruptcy Proceedings • Bankruptcy provides different relief: • Chapter 7: Liquidation (wipe out all debt) • Chapter 11: Corporate Reorganizations. • Chapter 12: Family Farmers. • Chapter 13: Adjustment of Individuals’ Debts with a payment plan. • Special Treatment of Consumer-Debtors.

8. Chapter 7--Liquidation • Most familiar. • Any person (including corporation) • All debts are discharged. • Begins with a voluntary or involuntary Filing of a Petition (Automatic Stay). • Voluntary: filed by debtor. • Involuntary: creditors force debtor to file. • Order for Relief.

9. Chapter 7 • Debtor must understand there are other chapters available. • 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. • Swear to these and sign. Federal crime to misrepresent.

10. Chapter 7 • Automatic Stay upon Filing of Petition: Either voluntary or involuntary. • Creditors cannot commence or continue most legal actions. • Damages for violation of stay. • Creditors can get “adequate protection.” • Periodic or one time cash payments or equivalent.

11. Chapter 7--Creditors • 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. • Leases cannot be for more than one year.

12. Chapter 7--Creditors • Allowed unless disputed. • If claim is disputed or unliquidated, court will decide value. • It is a crime to file false claim. • Employment contracts and real estate.

13. Chapter 7–Property • 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.

14. Chapter 7–Property • 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.

15. Chapter 7–Exempted Property • Up to $18,450 in home equity. • Up to $2,950 in car. • Up to $9,850 in personal possessions (up to $450 per item). • Up to $1,225 in jewelry. • Up to $1,850 in tools. • Social security, alimony and support payments. • Up to $18,450 in personal injury awards.

16. Chapter 7–Trustee’s Role • Court-appointed until first meeting of creditors. • Creditors elect permanent trustee • Administers estate. • Collects proceeds, liquidates assets and pay Creditors in order of priority.

17. Trustee’s Duties (2005) • New Duties under the 2005 Bankruptcy Reform Act: • Promptly review all materials filed by debtor. • Not later than 40 days after filing, Trustee must file: a motion to dismiss the case, change to Chapter 13, or why motion would not be appropriate. • New duties to protect domestic-support obligations.

18. Chapter 7–Trustee’s Powers • 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 can stand in shoes of debtor and assert any lack of capacity or lack of assent.

19. Trustee’s--Preference • 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.

20. Trustee--Preferences • 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. • Consumer can transfer up to $600 without constituting a preference.

21. Trustee--Liens • 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.

22. Fraudulent Transfers • 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.

23. Chapter 7—Distribution of 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.

24. Chapter 7—Distribution of 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.

25. Chapter 7--Discharge • Exemptions. • Objections to Discharge. • Effect of Discharge. • Revocation of Discharge. • Reaffirmation of a Debt.

26. Chapter 7—Discharge Exceptions • Claims for back taxes. • Claims for amounts borrowed by Debtor to pay federal taxes. • Claims against property/money obtained by Debtor under false pretenses. • Claims by Creditors who did not know about bankruptcy. • Student Loans. CASE 21.2In re Savage (2004).

27. Chapter 7--Reaffirmation of Debt • Debtor may wish to pay a debt notwithstanding the debt could be discharged in bankruptcy. • Agreement is filed with court. • Debtor can rescind agreement at any time.

28. Chapter 11 --Reorganization • 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.

29. Chapter 11--Reorganization • “Fast track” Chapter 11 for small business debtors whose liabilities do no exceed $2 million and who do not own or manage real estate. • “Workouts” (private negotiated settlements).

30. Chapter 11--Reorganization • Debtor in Possession (DIP). • Trustee may be appointed. • DIP has same powers as trustee in Chapter 7. • Strong-arm clause. • Collective Bargaining Agreements. • Creditors’ Committees.

31. Chapter 11--Reorganization • The Reorganization Plan. • Acceptance and Confirmation of the Plan. • CASE 21.3In re Beyond.com Corp. (2003) • Rehabilitates debtor and conserves estate • Plan must be equitable and: • Designate classes of claims and interests. • Specify treatment to be afforded the classes. • Provide adequate means for execution.

32. Chapter 13--Repayment • Chapter 13: Individuals’ Repayment Plans. For individuals with regular income who owe fixed unsecured debts of <$307,675 or fixed secured debts of <$922,975. • Not for partnerships or corporations.

33. Chapter 13–Repayment • Repayment Plan. • For all or a portion of debts to be paid during a period not to exceed 3 years. • Confirmation of the Plan. • Hearing for interested parties to object to plan. • Court will confirm (order) the plan after creditors approve. • Objections to the Plan. • Discharge balance of debt (after completion of all payments in the plan).

34. Chapter 12—Family Farmer • Chapter 12: Family Farmer Plans. • “Family Farmer”: 50% of gross income comes from farming and whose debts are 80% farm related. • Procedure for filing. • Content of plan. • Court confirmation.