Creditors’ Rights and Bankruptcy

Chapter 16

Secured Transactions

• Article 9 of UCC

• A transaction in which the payment of a debt is secured by collateral.

Secured Transactions

Collateral

– Property, including accounts and chattel paper (i.e., a note evidencing a debt secured by personal property), which is subject to a security interest.

Secured Transactions

Security Interest

– An interest in personal property or fixtures which secures payment or performance of an obligation.

Secured Transactions

Security Agreement

– An agreement creating or memorializing a security interest granted by a debtor to a secured party.

Secured Transactions

Secured Party/Creditor

– A lender, seller, or any other person who is a beneficiary of a security interest, including a person to whom accounts or chattel paper has been sold.

Creating A Security Interest• Collateral must be in possession of Creditor or

there must be a written agreement describing the collateral signed by Debtor.– Creditor must give something of value to Debtor.

– Debtor must have “rights” in collateral.

• Once these requirements are met, the creditor’s rights “ATTACH” to the collateral, giving the creditor an enforceable security interest.

Perfection of Security Interest

• Perfection - process by which secured parties protect their security interests in collateral against the claims of third parties who may look to the same collateral to satisfy the debtor’s obligations to them.

Perfection of Security Interest

• A secured party can perfect a security interest by filing a financing statement with the appropriate state office.

• Financing Statement

– A document filed under the debtor’s name to give notice to third parties that the creditor claims an interest in the collateral.

Perfection of Security Interest

• A financing statement contains the following:

– The names and addresses of both the debtor and the secured party

– A description of the collateral

Perfection of Security Interest

Perfection Without Filing

• By Possession

• Purchase-Money Security Interest (PMSI)

- automatically perfected in consumer goods upon attachment

Scope Of Security Interests

• In addition to covering collateral already in the debtor’s possession, a security agreement can cover other property and crate a “floating lien.”

– Proceeds of Collateral

– After Acquired Property

– Future Advances of Debt

Priorities

• Perfected vs. Unperfected Security Interests

– When one secured party has a perfected security interest in collateral and another secured party has an unperfected security interest in the same collateral, the perfected interest prevails.

Priorities

• Conflicting Perfected Security Interests

– When two or more secured parties have perfected security interests in the same collateral, generally the first to perfect (by filing or possession) has priority.

Priorities

• Conflicting Unperfected Security Interests

– When two or more secured parties have unperfected security interests in the same collateral, generally the first to attach has priority.

Remedies On Default

• Default - A debtor’s failure to pay a debt when due and/or a secured party’s failure to discharge a debt when paid.

Remedies On Default

• Repossession - A secured party can take possession of the collateral and either (i) retain it for satisfaction of the debt, or (ii) resell it and apply the sale proceeds to the debt remaining.

Disposition Procedures

• A secured party who chooses to dispose of collateral must do the following:

– Sell it in a commercially reasonable manner, and

– Notify the debtor of the time and place of the sale (to allow the right of redemption of debtor to be exercised).

Disposition Procedures• Proceeds from disposition must be applied

as follows:

– Reasonable expenses of retaking, holding, or preparing for sale

– Satisfaction of the debt due to the secured party

– Satisfaction of other secured creditors

– Any surplus to the debtor

Disposition Procedures

• If some of the debt remains unsatisfied after all of the collateral has been disposed of, the secured creditor may obtain a deficiency judgment against the debtor.

Additional Laws For 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).

Additional Laws For Creditors

• Suretyship

-Contract in which third party agrees to be responsible for obligation of a party to a contract.

-Examples include guaranty, surety bond, etc.

-Must be in writing under Statute of Frauds

Rights of Debtors

• Homestead Protection

• Household furniture up to a specified dollar value

• Other Personal Property such as autos, animals, tools of trade

Bankruptcy

• Voluntary Bankruptcy

– A debtor who finds himself or herself unable to pay debts as they become due may voluntarily petition for bankruptcy.

• Involuntary Bankruptcy

– A bankruptcy petition may be filed against a debtor by his or her creditors.

Automatic Stay

• Once a bankruptcy petition is filed voluntarily or involuntarily, virtually all other litigation or other action by creditors or potential creditors against the debtor or the debtor’s property are suspended until the bankruptcy is resolved and the stay is lifted.

Bankruptcy• Chapter 7 Liquidation - The sale of all nonexempt

assets of a debtor and distribution of the proceeds to the debtor’s creditors (can chose between federal exemptions and state exemptions).

• Priorities in Distribution:– Secured Creditors– Categories of Unsecured Creditors

• Discharge of Debtor

Bankruptcy: Discharge

• There are a number of non-dischargeable debts, including back taxes, alimony and child support, student loans, and consumer credit obtained within 60 days of filing.

2005 Changes to Bankruptcy

• Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 amended requirements for personal bankruptcies-must use federal homestead exemption if filing within 1215 days of moving to a new state (limited to $125,000)-must have income below median income of the state to chose Chapter 7-must attend credit counseling before and after bankruptcy

Bankruptcy: Chapter 11

• Under Chapter 11 reorganization, business debtor and its creditors formulate a plan in which the debtor repays a portion of its debts and is discharged from the remainder.

• Reorganization Plan - A plan to conserve and administer the debtor’s assets in the hope of an eventual return to successful operation.

Bankruptcy: Chapter 13

• Wage-Earner Plan– Individuals with regular income who owe fixed

unsecured debts of less than $336,900 or fixed secured debts of less than $1,010,650 may voluntarily petition the bankruptcy court for relief under Chapter 13.

Creditors’ Rights and Bankruptcy

End of Chapter 16