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,

LiensLiens: : encumbrance (claim encumbrance (claim upon) on property to satisfy a upon) on property to satisfy a debt, or protect a claim for the debt, or protect a claim for the payment of debt.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

LiensLiens (continued). (continued).Artisan’s Liens: labor and

materials on personal property.Judicial Liens: arises out of a

court decision. Writ of Attachment. Writ of Execution.


Permits a creditor to collect a Permits a creditor to collect a debt by seizing property of debt by seizing property of the debtor held by a third the debtor held by a third party (garnishee).party (garnishee).Typically the garnishee is the

debtor’s employer. Garnishment Proceedings Garnishment Proceedings

governed by state law. governed by state law.


Garnishment (cont’d). 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.


Creditors take less than owed Creditors take less than owed on a liquidated debt.on a liquidated debt.

Binding on those who agree Binding on those who agree because consideration given because consideration given by each depending on one by each depending on one another.another.


SuretyshipSuretyship: : Promise by a third Promise by a third person to be person to be primarilyprimarily liable for liable for the debtor’s obligation to the the debtor’s obligation to the creditor.creditor.Express contract between surety

and the creditor.Creditor can demand payment

from surety at any time after debt is due.


SuretyshipSuretyship: (cont’d). : (cont’d). Creditor need not exhaust all

legal remedies against the debtor before holding the surety responsible.


GuarantyGuaranty: third person : third person making the guaranty is making the guaranty is secondarilysecondarily liable. liable.Guarantor is liable only after the

principal debtor defaults.



Guaranty: (continued). 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?


ActionsActions Releasing Surety and Releasing Surety and Guarantor: Guarantor: same as those that same as those that will discharge the guarantor.will discharge the guarantor.

DefensesDefenses: : Surety can use any Surety can use any of the principal debtor’s of the principal debtor’s defenses EXCEPT incapacity, defenses EXCEPT incapacity, bankruptcy, or statute of bankruptcy, or statute of limitations. limitations.


DefensesDefenses: (continued).: (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.


DefensesDefenses: (continued).: (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.


Right of Subrogation.Right of Subrogation. Right of Reimbursement.Right of Reimbursement. Right of Contribution.Right of Contribution.

Sureties in equal amounts.Sureties in equal amounts, one or

more co-sureties missing or insolvent.


Exempted Real Property.Exempted Real Property.Homestead: state laws permit

entirely or up to a certain dollar amount.

Exempted Personal Property.Exempted Personal Property.Household furniture up to certain

limit.Clothing and personal possessions.Vehicle for transportation.


Exempted Personal Property Exempted Personal Property (cont’d).(cont’d).Certain classified animals.Equipment debtor uses in a trade

or business, up to certain dollar amount.


Goals of Bankruptcy Law.Goals of Bankruptcy Law. Bankruptcy Courts.Bankruptcy Courts. Types of Bankruptcy Relief: Types of Bankruptcy Relief:

Chapter 7, Chapter 11, Chapter Chapter 7, Chapter 11, Chapter 12 and Chapter 13 for 12 and Chapter 13 for individuals. individuals.

Special Requirements for Special Requirements for Consumer-Debtors. Consumer-Debtors.


Chapter 7 – liquidation.Chapter 7 – liquidation. Chapter 11 – reorganizations. Chapter 11 – reorganizations. Chapter 12 - adjustment of Chapter 12 - adjustment of

debts of family farmers and debts of family farmers and fishermen with regular fishermen with regular incomes.incomes.

Chapter 13 - adjustment of Chapter 13 - adjustment of debts of individuals with debts of individuals with regular incomes.regular incomes.


Chapter 7: ordinary or Chapter 7: ordinary or straight bankruptcy. 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.


Available for any person, Available for any person, individual, corporation, or individual, corporation, or partnership.partnership.

But - railroads, insurance But - railroads, insurance companies, banks, savings companies, banks, savings and loan and investment and loan and investment companies licensed by the companies licensed by the SBA, and credit unions cannot SBA, and credit unions cannot be debtors.be debtors.


Straight bankruptcy is Straight bankruptcy is commenced by the filing of a commenced by the filing of a voluntary or involuntary voluntary or involuntary petitionpetition in bankruptcy with in bankruptcy with the bankruptcy court.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

Prior to filing, debtor(s) must Prior to filing, debtor(s) must receive credit counseling receive credit counseling within 180 days of filing, and within 180 days of filing, and submit certificate.submit certificate.

Debtor must confirm Debtor must confirm accuracy of contents; accuracy of contents; attorney must file affidavit attorney must file affidavit informing debtor about other informing debtor about other chapters.chapters.


Chapter 7 Schedules: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

Chapter 7 Schedules (cont’d):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.


Chapter 7 Schedules (cont’d):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.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

Determines whether debtor’s Determines whether debtor’s petition will be dismissed petition will be dismissed under Chapter 7. 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.


Determines whether debtor’s Determines whether debtor’s petition is eligible for Chapter petition is eligible for Chapter 7. If not, will be dismissed.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.


Means Test (cont’d). 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.



Additional Grounds for Additional Grounds for Dismissal.Dismissal.Conviction of violent crime or

drug-trafficking.Debtor fails to pay post-petition

domestic-support obligations. Order for Relief.Order for Relief.

If filing is proper, filing itself is an order for relief.


Creditors force debtor into Creditors force debtor into bankruptcy. 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.


Debtor can challenge Debtor can challenge involuntary bankruptcy but involuntary bankruptcy but court will enter an order for court will enter an order for relief if:relief if:Debtor is not paying debts as

they come due, ORThe debtor was in receivership for

the 120 days before filing the petition.


Penalties for frivolous Penalties for frivolous petitions against debtors, petitions against debtors, including Punitive damages.including Punitive damages.

If court dismisses involuntary If court dismisses involuntary petition, creditors may be petition, creditors may be required to pay fees and required to pay fees and costs, and in some cases, costs, and in some cases, punitive damages.punitive damages.


The moment a petition is The moment a petition is properly filed, an automatic properly filed, an automatic stay is granted protecting stay is granted protecting debtor from all creditors.debtor from all creditors.Creditors cannot commence or

continue most legal actions.Damages for knowing violation of

stay.


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.


Exceptions to the Automatic Stay. Domestic Support Obligations. Proceedings against Debtor related to divorce, support, custody, and maintenance.

Investigations by securities regulatory agency.


Limitations on the Automatic Stay. Secured party can petition bankruptcy court for relief from automatic stay.


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.


Estate includes (Estate includes (cont’dcont’d):):Proceeds and profits from the

property of the estate.After-acquired property such as

inheritances, property settlements, and life insurance death proceeds.


Appointed by Court: duties Appointed by Court: duties include collecting assets and include collecting assets and paying creditors in order of paying creditors in order of priority.priority.Duties for Means Testing: to

determine whether there is substantial abuse. Must file statement within 10 days after 1st meeting with creditors.


Trustee’s Powers: Trustee’s Powers: has right to has right to ‘strong arm’ creditors return ‘strong arm’ creditors return debtor’s property to trustee. debtor’s property to trustee. Has “Avoidance Powers” to set

aside certain transfers: Voidable Rights. Preferences. Fraudulent Transfers.


Trustee can stand in shoes of Trustee can stand in shoes of debtor and assert any lack of debtor and assert any lack of capacity or lack of assent.capacity or lack of assent.


Debtor not permitted to transfer Debtor not permitted to transfer property or make a payment that property or make a payment that favors—or gives a favors—or gives a preferencepreference—to —to one creditor over another. one creditor over another. For a Trustee to recover payment,

debtor must be insolvent and transferred property for preexisting debt within previous 90 days.


Preferences to Insiders: avoidance power of Trustee extends to transfers made within ONE YEAR before filing.


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.


Trustee may avoid fraudulent Trustee may avoid fraudulent transfers if madetransfers if made: (1) within : (1) within two years of filing of petition, or two years of filing of petition, or (2) with actual intent to hinder, (2) with actual intent to hinder, delay or defraud a creditor. delay or defraud a creditor.


1.1. Up to $21,625 in equity in the Up to $21,625 in equity in the debtor’s residence and burial debtor’s residence and burial plot (the homestead exemption).plot (the homestead exemption).

2.2. Interest in a motor vehicle up to Interest in a motor vehicle up to $3,450. $3,450.

3.3. Interest, up to $550 for a Interest, up to $550 for a particular item, in household particular item, in household goods and personal effects (up to goods and personal effects (up to $11,525). $11,525).


4.4. Interest in jewelry up to $1,450. Interest in jewelry up to $1,450. 5.5. Interest in any other property up Interest in any other property up

to $1,150, plus any unused part to $1,150, plus any unused part of the $21,625 homestead of the $21,625 homestead exemption up to $10,825.exemption up to $10,825.

6.6. Interest in any tools up to Interest in any tools up to $2,175.$2,175.

7.7. A life insurance contract owned A life insurance contract owned by the debtor. by the debtor.


8.8. Certain interests in accrued Certain interests in accrued dividends and interest not to dividends and interest not to exceed $11,525.exceed $11,525.

9.9. Professionally prescribed health Professionally prescribed health aids. aids.

10.10.Social Security and other benefits. Social Security and other benefits. 11.11.The right to receive certain The right to receive certain

personal-injury and other awards personal-injury and other awards up to $21,625.up to $21,625.


2005 Bankruptcy Reform Act: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.


Creditors’ Meeting: Creditors’ Meeting: Trustee Trustee calls meeting of creditors, to calls meeting of creditors, to examine debtor under oath.examine debtor under oath.

Creditors’ Claims: Creditors’ Claims: to receive a to receive a portion of debtor’s estate, each portion of debtor’s estate, each creditor must file a proof of creditor must file a proof of claim. Necessary if there is any claim. Necessary if there is any dispute.dispute.


Debtor must file a statement of Debtor must file a statement of intention regarding secured intention regarding secured collateral. 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.



ExceptionsExceptions to Discharge: to Discharge: discharge of a debt may be discharge of a debt may be denied (see pages 346-347).denied (see pages 346-347).

ObjectionsObjections to Discharge: to Discharge: court court may deny claims based on may deny claims based on debtor’s conduct.debtor’s conduct.

EffectEffect of Discharge: of Discharge: voids, or voids, or sets aside any judgment and sets aside any judgment and prohibits any collector action. prohibits any collector action.


Debtor agrees to pay a debt Debtor agrees to pay a debt in bankruptcy by executing a in bankruptcy by executing a reaffirmation agreement.reaffirmation agreement.Reaffirmation Process: before discharge.

Reaffirmation Disclosures.


Chapter 11—Corporations. Chapter 11—Corporations. Debtor and Creditors Debtor and Creditors formulate a plan under which formulate a plan under which the Debtor pays a portion of the Debtor pays a portion of its debts and is discharged of its debts and is discharged of the rest.the rest.Same debtors as are eligible

under Chapter 7.


““Fast Track” Chapter 11 for Fast Track” Chapter 11 for small business debtors whose small business debtors whose liabilities do not exceed $2 liabilities do not exceed $2 million and who do not own million and who do not own or manage real estate.or manage real estate.

Workouts.Workouts. Focus is on the Best Interests Focus is on the Best Interests

of the Creditors. of the Creditors.


Debtor in Possession (DIP): Debtor in Possession (DIP): business operates under court business operates under court supervision.supervision.DIP has same powers as trustee.But court may appoint trustee

(receiver) with ‘strong arm’ powers.

Creditors Committees. Creditors Committees.


Plan must be fair and Plan must be fair and equitable to all parties. equitable to all parties. Filing the Plan: within 120 days

after date relief order.Acceptance and Confirmation of

the Plan. Discharge.Discharge.


Chapter 13Chapter 13: Individuals’ : Individuals’ Repayment Plans. Not for Repayment Plans. Not for partnerships, corporations.partnerships, corporations.For individuals with regular

income who owe fixed unsecured debts of <$360,475 or fixed secured debts of <1,081,400.


Chapter 13 Chapter 13 (continued).(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.


Confirmation of the Plan: Confirmation of the Plan: court may refuse to accept or court may refuse to accept or accept with “cram down.” accept with “cram down.”

Discharge: after debtor has Discharge: after debtor has completed all payments, completed all payments, court grants discharge. court grants discharge.


CASE 15.3 CASE 15.3 United States United States Aid Funds, Inc. v. Aid Funds, Inc. v. Espinosa Espinosa (2010). (2010). Why Why didn’t the court hold that didn’t the court hold that Espinosa’s plan was ‘void’?Espinosa’s plan was ‘void’?


Family Farmers and Fishermen.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.


Filing the Petition: Filing the Petition: similar to similar to process under Chapter 13.process under Chapter 13.

Content and Confirmation of Content and Confirmation of the Plan:the Plan:Confirmed or denied within 45

days of filing, same as repayment plan.

Unsecured creditors.


Documents

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,