Creditors’ Rights and Bankruptcy

Bankruptcy

People avoid debtsDebtors get a fresh start

Should bankruptcy be easy? What should we consider?

MN 3-3.9 bankruptcies per 1,000 population

Individual Bankruptcy in MN (12,901 filings in most recent quarter available – 2nd Qtr. 2014)

2005 Law Change

Chapter 7

Chapter 13

Bus Ch 7

Liens – Creditors’ Rights

Mechanic’s Lien Artisan’s Lien (Possessory) Innkeeper’s Lien Judicial Lien (writ of attachment, writ of execution)

Must File Lien in Some Cases and Give Notice of Foreclosure and Sale

Filing

Creditors’ Rights

Garnishment Mortgage Foreclosure

– Extra to Mortgagor– Deficiency Judgment

• Shanks v. Lowe (2001)• Garnishment of tips how can the employer collect the tips?

• Are tips wages subject to garnishment?

RepossessionLien on a Car

End-of-Chapter Q: 1Nabil, a homeowner, hires Kanhari Electric to fix his electrical system in his home. The bill is for $10,000. Nabil does not pay. The state has a homestead exemption of $60,000 and the home is worth $100,000. What is likely to happen?

Guarantor and Surety

Guarantor– Only Liable after default

Surety – Primarily liable

Case 15.2 Tony MaroniTony Riviera, the owner of Tony Maroni’s pizza entered into a contract to lease space for a pizza restaurant. The landlord asked Tony to sign both the contract and a guarantee. Tony signed the guarantee as “Tony, President.” Tony then failed to pay for the lease, is the guarantee valid? What’s the issue?

Defenses and Rights of Surety and Guarantor

Material Modification of the obligation– compensated surety

(released to extent of loss)– gratuitous surety (released

completely) Debt paid Defenses available to

principal debtor (but not bankruptcy, incapacity, or statute of limitations)

Own Defenses (bankruptcy, etc)

Subrogation Reimbursement Right of contribution

from co-sureties

Defenses Rights

QuestionMeredith borrowed $5,000 from a Bank and gave the bank $4,000 in bearer bonds as collateral. Meredith’s neighbor also signed as a surety on the note. Meredith did not pay the note and the Bank asked the neighbor to pay it and he did. Can the neighbor demanded the bearer bonds from the bank?

Bankruptcy – A Comparison

CHAPTER 7 CHAPTERS 12 & 13CHAPTER 11ISSUE

Liquidation. Adjustment.Reorganization.PURPOSE

WHO CAN PETITION

Debtor (voluntary) or creditors (involuntary).

Debtor (voluntary) only.Debtor (voluntary) or creditors (involuntary).

WHO CAN BE A DEBTOR

Any “person” except railroads, insurance companies, banks, savings and loan institutions, investment companies licensed by the Small Business Administration, and credit unions. Farmers and charitable institutions cannot be involuntarily petitioned.

Chapter 12—Any family farmer (one whose gross income is at least 50% farm dependent and whose debts are at least 80% farm related) or any partnership or closely held corporation at least 50% owned by a farm family, when total debt does not exceed $1.5 million.Chapter 13—Any individual with regular income who owes fixed unsecured debts of less than $269,250 or fixed secured debts of less than $807,750.

Any debtor eligible for Chapter 7 relief; railroads are also eligible.

Continued...

CHAPTER 7 CHAPTERS 12 & 13CHAPTER 11ISSUE

PROCECDURE LEADING TO DISCHARGE

Nonexempt property is sold with proceeds to be distributed (in order) to priority groups. Dischargeable debts are terminated.

Plan is submitted and must be approved if the debtor turns over disposable income for a three-year period; if the plan is followed, debts are discharged.

Plan is submitted; if it is approved and followed, debts are discharged.

ADVANTAGES On liquidation and distribution, most debts are discharged, and the debtor has an opportunity for a fresh start.

Debtor continues in business or possession of assets. If the plan is approved, most debts are discharged after a three-year period.

Debtor continues in business. Creditors can either accept the plan, or it can be “crammed down” on them. The plan allows for the reorganization and liquidation of debts over the plan period.

Chapter 7 -- Liquidation

Ordinary Bankruptcy Assets to Trustee Trustee sells assets distributes proceeds Remaining debts discharged

Filing the Petition

Voluntary– list of both secured and unsecured creditors/amount owed– financial affairs– list of property owned– current income and expenses– order for relief– Abuse

Involuntary Bankruptcy– More than 12 creditors,

three must have claims totaling $13,475

– Fewer than 12 - one or more must have a claim of $13,475

– Not paying debts– General receiver took

possession of property

Terms

Automatic Stay Creditors’ Meeting

– Examination of creditor– Proof of claim– Wages and rents limited to one year

Property of the Estate– within 180 days

Exempted Property– motor vehicle ($3,225)– Home ($136,875)

Trustee’s Role

Trustee’s Powers– take delivery of property– rts of creditors and debtor– cancel transactions

Voidable Rights (fraud, incapacity, duress, mutual mistake)

Preferences – recover payments - w/in 90

days) if insolvent at time made

– If “insider” one year

Fraudulent Transfers (one year) Secured Creditors Unsecured Creditors

End-of-Chapter Q: 13-2Peaslee borrowed $6,000 from his father to pay creditors in February. Paid Father Back First - $6,000. Three

months later he paid his father back. Paid ½ to Another Debtor Later. Peaslee

also paid Cool Springs half the amount Peaslee owed Cool Springs on July 1. On Sept 1,

Then Declared Bankruptcy. Peaslee voluntarily claimed bankruptcy. Do his father and Cool Springs have to pay the money back?

Student Debate Penn Dept of Welfare v. Davenports

Not Dischargeable

Back Taxes Amounts borrowed to

pay federal taxes money obtained by

false pretences creditors not notified of

the bankruptcy fraud, misuse, larceny Judgments against a

debtor’s drunk driving

Alimony/child support claims based on willful or

malicious conduct Gov. fines Student Loans (hardship) Consumer Debts for Luxury

goods w/in 60 days of more than $650

Cash advances totaling more than $925 w/in 70 days

$200,000 acquired and spent without telling trustee• Purchased $30,000 guard dogs (family pets?),

$60,000 fur coat and jewelry worth $47,000 (gave as gifts – to whom he could not recall)

• Transferred $81,000 to former spouse of Hecker’s ex-wife – used to buy gift cards

Discharge of Student LoansIn Re Savage

Graduated at age 41 5 loans – owed $32,248 Made $3,079 per month (possible her

income might increase) 15 year old son – attended private

school

Credit Card Fraud—The Intent Factor

Benethel Rembert took $11,600 in cash advances on her credit card. She used it to gamble, which she hoped to repay with her winnings. The court decided there was no fraud because she intended to repay the debt.

The U.S. Court of Appeals for the Ninth Circuit also addressed this issue. It concluded that the “hopeless state of a debtor’s financial condition should never become a substitute for an actual finding of bad faith.”

What steps might creditors take to protect themselves against such problems?

Objections to Discharge

Concealment or Destruction of Property Concealment or Destruction of Financial

Records Discharge Granted within Previous 6 Years

Chapter 13–Repayment Plan

Chapter 13 – Repayment Plan. Provides for the “Adjustment of Debts of an Individual with Regular Income.”

Less Expensive. Repayment plans are less expensive and less complicated than reorganization proceedings or liquidation proceedings.

Confirmation Hearing. After the plan is filed, the court holds a confirmation hearing, at which interested parties may object to the plan.

Chapter 13 - Repayment Plan

Individuals (not corps or partnerships -- but sole proprietorships) Voluntary only

Regular Income Limited Debt

– Unsecured Debt < $269,250– Secured Debt <$807,750

Can be converted to a ch 7 or 11. Repayment Plan (5 years max)

Unsecured Priority - Each class paid in full prior to next

1. Admin. Expenses

2. Bus. Expenses

3. Unpaid Wages ($4,300)

4. Benefit Plans 180 days ($4,300)

5. Farmers and Fishers ($4,300) storage

6. Consumer Deposits ($1,950) Color Tile Example.

7. Paternity, alimony, child support

8. Taxes

9. General Creditors (everyone else - credit cards)

Start here Tuesday – started chapter 13

Chapter 11 -- Reorganization

Voluntary or Involuntary Workout - out of court Court may dismiss for cause --

– absence of reasonable likelihood of rehabilitation– no plan– unreasonable delay

Debtor in Possession Creditors’ Committees

– (debts < $2 mil)

Ch 11 - Reorganization Plan

Designate Classes of Claims and Interests– Specify Treatment to be afforded the classes

Means of Execution. Provide an adequate means for execution– Only debtor first 120 days– any party if not consent w/in 180 days

Crammed Down on Creditors who do not consent

Chapter 11–Reorganizations

Critics of CH11. According to some critics, the main beneficiaries of Chapter 11, corporate reorganizations, are not the shareholder-owners of the corporations but attorneys and current management.

Eliminate Ch11? Should Chapter 11 be scrapped, as some critics recommend? Should it be amended to set time limits on reorganization proceedings?

2005 Changes

The "Means Test“

• Stringent expense allowances

• Residency requirements There are both federal and state bankruptcy laws and some state laws are more favorable than others. For example, both Florida and Texas have generous "homestead allowances," which permit debtors to shield assets under the umbrella of homeownership. But the new law aims to discourage "shopping around" for the best deal, so you can't file in a more favorable state unless you've lived there for at least two years.

• Mandatory credit counseling

• More paperwork In the new "get tough" environment, consumers will have to provide a lot more documentation to show that bankruptcy is warranted.

• Valuation increases The law provides that "collateral," which includes your furniture, clothes, autos and electronics, be assessed at a higher value than under the previous law. The new benchmark: replacement value. Chances are, by the time you add up the total value of your possessions using this formula, it will be pretty high.

• You'll wait longer to file again CH7 – 8 years 13 four

• Student loans. Under the old law, you couldn't get rid of student loans backed by the government or a non-profit. This protection has been extended to private lenders as well.