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Chapter20-CreditorsRightsandBankruptcy.pptFUNDAMENTALS OF BUSINESS LAW, 10E
ROGER LEROY MILLER
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CHAPTER 20
CREDITORS’ RIGHTS AND BANKRUPTCY
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© 2016 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.
LEARNING OBJECTIVES
What is garnishment? When might a creditor undertake a garnishment proceeding?
When is private mortgage insurance required, and which party does it protect?
What procedure does a debtor follow in a voluntary bankruptcy?
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LEARNING OBJECTIVES (CONT’D)
What is a trustee? What does a trustee do?
In a Chapter 11 reorganization, what is the role of the debtor in possession?
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INTRODUCTION
- In this chapter, we focus on some basic laws that assist the debtor and creditor in resolving disputes.
- We examine the process of bankruptcy as a last resort in resolving debtor-creditor problems.
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© 2016 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.
LAWS ASSISTING CREDITORS
- Liens
- A lien is a claim against property to satisfy a debt or protect a claim for the payment of a debt
- Mechanic’s lien—real estate becomes security
- Artisan’s lien—is possessory
- Judicial liens—when a creditor attempts to collect on a debt before or after a judgment is entered by a court
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© 2016 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.
LAWS ASSISTING CREDITORS
- Garnishment
- Garnishment is a collection remedy that allows the creditor to collect a debt by attaching the debtor’s funds (e.g., wages, bank accounts) and property that are held by a third person.
- Usually a postjudgment remedy
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© 2016 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.
LAWS ASSISTING CREDITORS
- Creditors’ Composition Agreements
- Creditors’ composition agreements are contracts between a debtor and creditor to discharge debts at a sum less than the amount owed.
- Suretyship and Guaranty
- A third party agrees to be liable for the debt owed by the debtor.
- See Exhibit 20.1
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© 2016 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.
EXHIBIT 20.1
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© 2016 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.
LAWS ASSISTING CREDITORS
- Mortgages
- When individuals purchase real estate, they usually make a down payment and take out a mortgage loan for the balance of the purchase price.
- Creditors protect themselves by requiring debtors to obtain private mortgage insurance if the down payment is less than 20 percent of the purchase price.
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© 2016 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.
LAWS ASSISTING DEBTORS
- Certain property is exempt from creditors’ actions under state laws.
- Exempted Real Property
- Each state’s homestead exemption permits the debtor to keep the family home or up to a specified dollar amount.
- Exempted Personal Property
- Furniture, cars, clothing, livestock, and business equipment are the most common exemptions.
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BANKRUPTCY LAW
- Bankruptcy Courts
- Bankruptcy proceedings are held in federal bankruptcy courts. Rulings can be appealed to the district courts.
- Types of Bankruptcy Relief
- Four “chapters” in Title 11 of the United States Code (U.S.C.) set forth the most important types of relief that debtors can seek: Chapters 7, 11, 12, and 13.
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© 2016 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.
BANKRUPTCY LAW
- Special Treatment of Consumer-Debtors
- A consumer-debtor is one whose debts result mostly from personal, family, or household goods.
- The Bankruptcy Code requires that the all consumer-debtors get:
- Written notice about the bankruptcy laws under which they may proceed
- Information about types of services credit counseling agencies provide
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CHAPTER 7—LIQUIDATION
- Liquidation under Chapter 7 is the most familiar type of bankruptcy; sometimes called ordinary or straight bankruptcy.
- Voluntary Bankruptcy
- Debtor must:
- Receive credit counseling
- File official Chapter 7 petition
- Confirm the accuracy of the petition’s contents
- State that he/she chose to proceed under Chapter 7 rather than other chapters
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CHAPTER 7—LIQUIDATION
- Involuntary Bankruptcy
If the debtor has 12 or more creditors, 3 or more of those creditors having unsecured claims totaling at least $14,425 must join in the petition.
If a debtor has fewer than 12 creditors, one or more creditors having a claim of $14,425 or more may file.
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CHAPTER 7—LIQUIDATION
- Automatic Stay
- Once a bankruptcy petition has been filed, creditors cannot contact the debtor by phone or mail or start any legal proceedings to recover debts or to repossess property. This is called an automatic stay.
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CHAPTER 7—LIQUIDATION
- Estate in Property
- A bankruptcy petition creates a dividing line between:
- Property acquired before the filing of the petition becomes property of the estate.
- Property acquired after the filing of the petition remains the debtor’s in most circumstances.
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CHAPTER 7—LIQUIDATION
- The Bankruptcy Trustee
- Appointed after the order for relief has been entered.
- The basic duty of the trustee is to collect the debtor’s available estate and convert it to cash for distribution.
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CHAPTER 7—LIQUIDATION
- Exemptions
- The trustee takes control over the debtor’s property, but an individual debtor is entitled to exempt certain property from the bankruptcy.
- The Homestead Exemption
- The Bankruptcy Code limits the amount that can be claimed.
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© 2016 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.
CHAPTER 7—LIQUIDATION
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CHAPTER 7—LIQUIDATION
- Distribution of Property
- The Code provides specific rules for the distribution of the debtor’s property to secured and unsecured creditors.
- If any amount remains after the priority classes of creditors have been satisfied, it is turned over to the debtor.
- See Exhibit 20.2
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EXHIBIT 20.2
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CHAPTER 7—LIQUIDATION
- Discharge
- Voids any judgment on a discharged debt and prevents any action to collect it.
- For a debtor, the main purpose of liquidation is to obtain a fresh start through the discharge of debts.
- Certain debts, however, are not dischargeable in bankruptcy.
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CHAPTER 7—LIQUIDATION
- Reaffirmation of Debt
- A debtor may wish to pay a debt—for example, a debt owed to a family member, physician, bank—even though the debt could be discharged in bankruptcy.
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CHAPTER 11—REORGANIZATION
- Chapter 11 is the type of bankruptcy proceeding used most commonly by corporate debtors.
- Workouts
- A private, negotiated adjustment of creditor-debtor relations is called a workout.
- Creditors’ Best Interests
- Case can be dismissed if it would better serve the interests of the creditors.
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CHAPTER 11—REORGANIZATION
- Debtor in Possession
- The debtor generally continues to operate the business as a debtor in possession.
- Creditors’ Committees
- Formed to ensure adequate representation of the creditors.
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CHAPTER 11—REORGANIZATION
- The Reorganization Plan
- Established to conserve and administer the debtor’s assets.
- The goal is to return the debtor’s organization to successful operation and solvency.
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CHAPTER 12—FAMILY
FARMERS AND FISHERMEN
- Congress created Chapter 12 in 1986.
- Filing the Petition
- The repayment plan can be initiated only by having the debtor file a voluntary petition or by the conversion of a Chapter 7 petition.
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CHAPTER 12—FAMILY
FARMERS AND FISHERMEN
- Content and Confirmation of the Plan
- The plan must provide for payment of secured debts at the value of the collateral.
- The plan must be confirmed or denied within 45 days of the filing of the plan.
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CHAPTER 13—INDIVIDUALS’
REPAYMENT PLAN
- Filing the Petition
- Similar to the procedure for filing a repayment plan under Chapter 12
- Good Faith Requirement
- The Code does not define good faith, but if the circumstances as a whole indicate bad faith, a court can dismiss a debtor’s Chapter 13 petition.
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CHAPTER 13—INDIVIDUALS’
REPAYMENT PLAN
- The Repayment Plan
- The repayment plan may provide for payment of all obligations in full or for payment of a lesser amount.
- Discharge
- After the completion of all payments under the plan, the court grants a discharge of the debts.
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