LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 39 Slide 1 Debtors, Creditors, and Bankruptcy 39-1 39-1Legal Protection of Creditors

LAW FOR BUSINESS AND PERSONAL USE LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING© SOUTH-WESTERN PUBLISHING

Chapter 39Chapter 39 Slide Slide 11

Debtors, Creditors, and Bankruptcy

39-139-1 Legal Protection of Creditors

39-239-2 Legal Protection of Debtors and Use of Credit Cards

39-339-3 Bankruptcy

CHAPTER 39

Lessons



Legal Protection of Creditors

Discuss four types of laws that protect creditorsExplain how liens are createdExplain how liens can protect creditor’s rights

LESSON 39-1

GOALS



Hot Debate

Norm drops his expensive watch off to be repaired

Told to come back tomorrowCalled on assignment to RussiaReturns 4 months later to pick up watch



Legal reasons for Norm’s suit?

The store owner knew of Norm’s job and the uncertainty of his being anywhere tomorrow.

Such notice would prevent a sale under the normal timeframe of the law.



Store’s reasons for selling the watch?

To cover their labor and parts expenditures



LAWS PROTECTING CREDITORS

Laws allowing secured debtsPledges - Security for the payment of a debt

PLEDGOR – debtorPLEDGEE – creditor



Pawn Shops

Pawn shops

How long must pawn shops hold your item(s)?

Pawn shops can only take tangible items



Liens In the event of a default in payment,

the creditor has the right to sell the item held to pay the debt.

Two types of involuntary liens:

Mechanic’s Lien rights to property for labor/materials

homes, buildings, other real property



Artisan’s Lien

right to possess property to ensure payment of the debtRepairing cars, hotel rentals

i.e. Mechanic can keep you automobile

until payment is received.



Laws involving third parties

S U R E T Y S H I PThird party assumes liability if the debtor

cannot pay. PrimarilyPrimarily liable

Principal debtor

CreditorSurety – oral contract can be sufficient (not legally

required), but should be in writing



Example of Right of Contribution



As a surety, what can you do if the debtor failed to pay and the money was collected entirely from you?

Sue the principal debtor



G U A R A N T Y – SecondarilySecondarily liablePerson who assumes liability if the

debtor cannot pay.Creditor must first sue the debtor and

get a judgment that proves the account is uncollectable (unlike a surety)

Must be in writing (unlike a surety)



Laws concerning unsecured debts

Creditor is in a weak positionMust sue debtor for payment and obtain

judgmentCostly and time consumingDebtor may flee



Another way debt can be settled is by bankruptcy.

Secured creditors may sell the collateral and satisfy their claim before unsecured creditors collect a dime.



Laws allowing garnishment of wages

Limited to 25% of debtor’s take-home pay

Under the Consumer Credit Protection Act

arnishing



Legal Protection of Debtors and Use of Credit Cards

Discuss six types of laws that protect debtorsDiscuss the advantages and disadvantages of

using credit cards

LESSON 39-2

GOALS



LAWS PROTECTING DEBTORS

Laws setting maximum interest ratesLaws requiring disclosure of termsLaws challenging unconscionable contractsLaws prohibiting abuses in the credit systemLaws requiring notice of debt payment to be

recordedLaws allowing debtors to cancel debts and

start over



Usury Laws

States set interest limits (~ 30%)Limit only applies to “on time” charges



Personal, family, household, agricultural PERSONAL

LOANS

VS

Business Loans

Commercial Loans

Consumer Borrowing



Federal Truth in Lending Act

Consumer Credit Protection Act

Requires creditors to clearly and completely disclose loan terms, i.e. interest and finance charges



Schumer Box - format



What is a Finance Charge? total added cost when one pays in

installments for goods/servicesAPR – Annual Percentage Rate

Example: 1-1/2 month = 18% year

Loan amount $30,000

Finance amount 5,400





Credit Sales Contract

cash price down payment or trade-in allowance itemized list of all finance charges total amount to be financed



Home Mortgages

Interest tends to be low debt secured by home – collateral

Therefore Truth in Lending Act does not protect mortgages



Truth in Lending Act

** F I N E D **

** IMPRISONED **

OR BOTH!+ pay the debtor twice the finance charges

(no less than $100, not more than $1,000.)

+ court fees

+ attorney’s fees



LEASING

Popular trend b/c no down payment Total price paid in leasing:

higher than cash purchase higher than credit purchase

especially true for +5 yr owners

Consumer Leasing Act extends protection of Consumer Credit Protection Act to lessees (consumer who leases)





Unconscionable Contracts

grossly unfair, oppressive, unethical

Example:

A motorist (who has no mechanical knowledge) breaks down.

Car is towed to a mechanic.



Mechanics dictates the following terms: Labor ------------------- $2,000. ($900.)

Parts -------------------- 1,000. ($500.) Emergency Service -- 800. ($50.)

Judge may:-- refuse to enforce-- enforce without unconscionable clause-- limit the clause’s application so the contract is

no long unfair



No relief for:

overpriced items poor quality unneeded goods



LAWS PROHIBITING ABUSES IN THE CREDIT SYSTEM

Federal Equal Credit Opportunity ActFederal Fair Debt Collection

Practices ActFederal Fair Credit Billing ActFederal Fair Credit Reporting ActCredit Repair Organizations Act



Federal Equal Credit Opportunity Act

Prohibits inquiries about: sex or marital status birth control practices childbearing intentions/capability

opening an account in maiden name

credit information reported in both names (women in the past were denied credit upon husband’s death)



Federal Fair Debt Collection Practices Act

Debt Collection Abuses

-- harassment of debtors

-- abusive and profane language

-- threats of violence

-- contact with third parties (relatives, friends, co-workers)

-- communication at work



Federal Fair Debt Collection Practices Act

no protection for individual creditors who try to collect money

in-house debt collection efforts employees of creditor

sue for serious abuses defamation assault invasion of privacy intentional infliction of mental suffering



Fair Credit Billing Act

mail bills at least 14 days before due consumer has 60 days to report errors respond to inquiries within 30 days settle complaints within 90 days

FTC Regional Office – report complaintsNational creditors – Washington DC



Fair Credit Billing Act

creditors may not send repeated, insistent letters demanding payment until disputes are settled

Purchases more than $50 (products are

defective) that were made in-state or within 100 miles of home – payment may be withheld



Allows discounts to customers who pay cash --



Credit Ratings

http://www.cbsnews.com/video/watch/?id=3993035n



Federal Fair Credit Report Act

Credit rating service companies





Credit rating

Assessment of one’s ability to pay debts







Denied Credit

Normally – one free credit report per year

Freecreditreport.com



Credit Repair Organizations Act

Consumer must sign Consumer Credit File Rights Under State and Federal Law

Make false claims about its services charge you until they complete the promised services perform any services until you have signed a written contract

and completed a 3-day waiting periodMust specify:

payment terms + total costs detailed description of services they will perform time they will achieve the results guarantees they offer repair company’s name and business address



Credit Repair

Suze Orman Credit Repair Scam



Notice of Debt Payment

Debtor can require the creditor to record the fact that the debt has been paid in public records (when satisfied)

Always get proof of payments – record payments properly



Last Resort

Bankruptcy



CREDIT CARDS

A credit card identifies the holder as a person entitled to obtain goods or services on credit.

A credit card is usually issued in response to a consumer’s written application.

The consumer who signs the card is bound in a contractual relation with the issuer and is liable for all purchases made with the card.



Store credit cards



Major credit cards



Credit card responsibilities

If lost or stolen $50 (charged before reporting)

Cardholder asked for & received cardSigned itUsed it

Issuer had informed liability for unauthorized use liability

Issuer provided description of how to report Issuer provided positive means for ID on card Unauthorized use happened before cardholder reported it stolen/lost



Credit card responsibilities



Bankruptcy

Explain the purpose and importance of the bankruptcy procedure

Identify the various types of bankruptcyDiscuss the limitations of bankruptcy in

discharging debts

LESSON 39-3

GOALS



Article I, Section 8US Constitutional Congress given

power to establish:Uniform laws on the subject of bankruptcy

throughout the United States



What does bankruptcy do?

Creditors – provides fair treatment in their competition for the debtor’s assets

Debtors – opportunity for a new economic start; free from most creditors’ claims



Bankruptcy Rates



Down PaymentDown PaymentMontana and Carolina could not wait to

graduate from high school and get married. They were shocked to learn how much the

other person owed.Montana had:

A new truckBorrowed money on his credit card for the down

payment, tag, and titleBooked their honeymoon to Mexico on his credit

card for $5,000.

60© 2008. Oklahoma State Department of Education. All rights reserved.



Down PaymentDown PaymentCarolina:• Drove an old car that constantly cost her money on

repairs • Charged those repairs on her credit card, along with

her clothes, shoes, dinners with friends, and everything else she wanted or needed

• Her charges totaled $8,000.

Is this a good start to a marriage? What do

you recommend Montana and Carolina do

to get control over their debt?61

© 2008. Oklahoma State Department of Education. All rights reserved.



Managing DebtManaging DebtRefinancing debt• Debt consolidation loan

• Combines all payments into one

• Tends to have high interest rate

• Must change your behavior or you will only have more debt!




Home Equity LoanHome Equity Loan

Borrow money on your home to pay your monthly bills.

If you miss one or more payments, you can lose your home.




Credit CounselingCredit Counseling

Restructure your debt

Set up a new payment plan

Monitor your progress

Some are not reputable




BankruptcyBankruptcy

A legal process where you request help from the courts to help manage your debt.

Bankruptcy petitionChapter 7 – Straight bankruptcy

Chapter 13 – Reorganization of debt

Financial counseling required




BankruptcyBankruptcyChapter 7• Bankruptcy trustee takes

your assets, converts them to cash, and uses the money to pay your creditors.


• Exempt and Non-exempt property• Most people who file only have exempt property.

• Cannot re-file for 8 years• No exceptions



BankruptcyBankruptcyChapter 13• Debt adjustment• Allows you to keep your property. • Repayment plan -

• You must have a job where you can make regular monthly payments to file.

• Lasts about three to five years.




Top Reasons for BankruptcyTop Reasons for Bankruptcy

Divorce

Illness

Gambling

Unemployment

Failing to pay taxes

Excessive medical bills


Why would these contribute to bankruptcy?Why would these contribute to bankruptcy?



When to File?When to File? When you have no other choice:• Financial or credit counseling?• Call creditors?• New payment plans?

It is a drastic action, so be sure!Contact an attorney for pre-screening.




Costs and Benefits of Costs and Benefits of BankruptcyBankruptcy

What are some of the “costs” of filing bankruptcy?

What are some of the “benefits” of filing bankruptcy?




What Have You Learned?What Have You Learned?

Rights

Responsibilities

Costs

Benefits




Life After Bankruptcy?Life After Bankruptcy?

Remains on credit history for ten yearsLower credit scoreHigher interest ratesHigh riskNot all debt eliminatedFees• Attorneys• Counseling• Others




Life After Bankruptcy? Life After Bankruptcy?

No more debt collectors calling

Reduces stress

Fresh start

Lessons learned




Repairing CreditRepairing Credit

Pay bills on time.

Establish budget.

Avoid credit repair services!Continue these good habits, and your score will increase!




EarningsEarnings

Good money management skills reduces the potential of filing bankruptcy or having excessive debt.

High levels of debt is stressful.

High levels of debt lead to personal and family problems.

Know your options to make the best choices when dealing with debt.




Balance SheetBalance Sheet

What are the options to bankruptcy?

Who files bankruptcy?

Why do people file bankruptcy?

What are the costs and benefits of bankruptcy?

How can you avoid bankruptcy?




Paid in FullPaid in Full So, what do you think Montana and Carolina should do?

If you said they need financial counseling, then you are correct.

Managing debt is very stressful and is frequently a source of marital problems, suicide, and health-related issues.




Paid in FullPaid in Full Young people are among the fastest growing segment of the population filing bankruptcy because of high debt levels.

With counseling and changes in behavior, this young couple might be able to avoid becoming a statistic.




You Be the JudgeYou Be the Judge You have successfully filed bankruptcy and

your debts have been forgiven. Does that ensure that you will have a successful financial future?

© 2008. Oklahoma State Department of Education. All rights reserved. 79



WHAT IS BANKRUPTCY?

Chapter 7 liquidation, or “straight bankruptcy”

Chapter 11 reorganizationChapter 13 extended time payment

planChapter 12 plan



Chapter 7 – Straight Bankruptcy

Non-exempt assets can be sold with proceeds going to pay off creditors

Will eliminate most of debt



PROCEDURE FOR CHAPTER 7 BANKRUPTCY

Voluntary bankruptcyInvoluntary bankruptcyExempt propertyLiquidation and distribution of proceeds



Which Property Is Exempt from Chapter 7 Liquidation?

Chapter 7 bankruptcy exemptions vary from state to state but may include your:

home home’s equity (a portion of it) Car (one car) land you own equipment and items needed for work insurance and pension payouts public benefits (like unemployment payments or workers

compensation) jewelry, up to a certain value; and various personal property (like furniture, appliances and

clothing).



Property That Can Be Subject to Chapter 7 Liquidation

additional homesvacation homesa second vehiclefamily heirloomsvaluable collector itemsmultiple televisionscash, bank accounts, stocks, bonds

and other investments.



Chapter 7 Bankruptcy




Chapter 11 - Reorganization

Committee files a plan for reorganization for a business organization

Committee will assess if plan is:ReasonableCreated in good faith

Must be in the best interests of the creditors

A class of creditors must vote to accept the plan

“Cramdown provision” – judge approves



Chapter 12 – Debt Relief for family farms (1986)

Files a petition for relief from creditorsDebtor cannot have:

debts totalling more than $1,500,000 income of at least 50 % from farm sources 80% of all debts related to the farm




Must have regular incomeAvoids liquidation of assetsUnsecured debts of less than $269,250Secured debts of less than $871,550Upon completion of payments – court

grants discharge of debts1976 – Educational Amendments (no

relief unless you can prove hardship)



Bankruptcy Petition - Voluntary

Filing a petition – beginning of voluntary bankruptcy

Person does not have to be insolvent (unable to pay debts when they are due) to file the petition.

Husbands and wives may file jointly



Bankruptcy Petition - Involuntary

Person / business owing at least $11,625 to their petitioning unsecured creditors and unable to pay debts when due may be FORCED into involuntary bankruptcy.

12+ creditors – 3 must sign petition



Petition

list of creditors and amouts owed list of all property owned (including

exempt property)statement explaining the debtors

financial affairslist of current income and expensesConcealing or transferring assets =

crime



Trustee

Bankruptcy trustee appointed Place secured creditors ahead of

unsecured creditors



Non-dischargeable Debts

certain taxesAlimony and child supportClaims against the debtor for property

obtained by fraud, embezzlement, or larceny

Claims against debtor for willful and malicious injury



Non-dischargeable Debts

student loans (gov’t. or nonprofit school)Unless loan became due more than 7 years

before the bankruptcyUndue hardship

Debts due to DWIClaims not listed by the debtor



Liquidation and Distribution

Trustee distributes proceeds to prioritized list of creditors.

Secured creditors first / Unsecured second!

Documents

LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 39 Slide 1 Debtors, Creditors, and Bankruptcy 39-1 39-1Legal Protection of Creditors