A Discharged Debtor Cannot Use Chapter 7 of the Bankruptcy Act Again for at Least Six Years Quizlet

16 Secured Transactions and Bankruptcy

After reading this chapter, you should understand the following:

1. The basic concepts of secured transactions
2. Creation and perfection of the security interest
3. Priorities for claims on the security interest
4. Rights of creditors on default
5. The basic performance of Chapter vii bankruptcy
6. The bones operation of Chapter 11 bankruptcy
7. The basic operation of Affiliate 13 defalcation

Introduction to Secured Transactions

Creditors desire assurances that they volition exist repaid by the debtor. An oral hope to pay is no security at all, and—equally it is oral—information technology is hard to prove. A is simply a written promise by the debtor to repay, merely the creditor stuck holding a promissory annotation with a signature loan but—while he may sue a defaulting debtor—will get nothing if the debtor is insolvent. Again, that'south no security at all. Existent security for the creditor comes in 2 forms: by agreement with the debtor or by operation of police force without an agreement.

Security obtained through agreement comes in three major types: (one) personal belongings security (the most common form of security, which nosotros will encompass in this chapter); (2) suretyship—the willingness of a third party to pay if the primarily obligated party does not; and (three) mortgage of real manor.

The law of secured transactions consists of v principal components: (1) the nature of property that tin can be the subject area of a security involvement; (2) the methods of creating the security interest; (3) the perfection of the security interest against claims of others; (iv) priorities among secured and unsecured creditors—that is, who will be entitled to the secured property if more than one person asserts a legal right to it; and (5) the rights of creditors when the debtor defaults. Subsequently considering the source of the law and some central terminology, we examine each of these components in plough.

Here is the simplest (and most common) scenario: Debtor borrows money or obtains credit from Creditor, signs a note and security understanding putting up collateral, and promises to pay the debt or, upon Debtor'south default, allow Creditor (secured party) take possession of (repossess) the collateral and sell information technology. "The Grasping Hand" Figure illustrates this scenario—the grasping hand is Creditor's accomplish for the collateral, but the mitt will non close around the collateral and take it (repossess) unless Debtor defaults.

Source of Law

Article 9 of the Uniform Commercial Code (UCC) governs security interests in personal property. The UCC defines the telescopic of the article (here slightly truncated):^[1]

Every bit always, it is necessary to review some definitions then that communication on the topic at hand is possible. The secured transaction always involves a debtor, a secured party, a security agreement, a security interest, and collateral.

Article nine applies to any transaction "that creates a security involvement." The UCC in Section 1-201(35) defines security interest every bit "an interest in personal property or fixtures which secures payment or performance of an obligation."

Security agreement is "an agreement that creates or provides for a security interest." It is the contract that sets upwards the debtor's duties and the creditor's rights in event the debtor defaults.^[2]

Collateral "means the belongings subject area to a security involvement or agronomical lien."^[3]

Purchase-money security interest (PMSI) is the simplest form of security involvement. Department 9-103(a) of the UCC defines "purchase-money collateral" every bit "goods or software that secures a buy-money obligation with respect to that collateral." A PMSI arises where the debtor gets credit to buy goods and the creditor takes a secured involvement in those goods. Suppose you desire to buy a large hardbound textbook on credit at your college bookstore. The managing director refuses to extend you credit outright but says she volition take dorsum a PMSI. In other words, she volition retain a security interest in the book itself, and if you don't pay, yous'll have to render the book; information technology will be repossessed. Contrast this situation with a counteroffer you might make: because she tells you not to mark up the book (in the event that she has to repossess information technology if you default), you would rather give her some other collateral to hold—for example, your gilt college signet ring. Her security interest in the ring is not a PMSI but a pledge; a PMSI must be an interest in the particular goods purchased. A PMSI would too exist created if you borrowed coin to buy the book and gave the lender a security interest in the volume.

Secured party is "a person in whose favor a security interest is created or provided for under a security understanding," and information technology includes people to whom accounts, chattel paper, payment intangibles, or promissory notes have been sold; consignors; and others under Section 9-102(a)(72).

Holding Subject field to the Security Interest

Now we examine what holding may exist put up as security—collateral. Collateral is—once again—holding that is subject to the security interest. Information technology tin can exist divided into four broad categories: goods, intangible property, indispensable paper, and other types of collateral. We will consider several in this section.

Goods

Tangible property as collateral is goods. Appurtenances means "all things that are movable when a security involvement attaches. The term includes (i) fixtures, (two) standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) the unborn young of animals, (4) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (five) manufactured homes. The term also includes a computer program embedded in goods."^[four] Goods are divided into several subcategories; several are taken up here.

Consumer Appurtenances

These are "goods used or bought primarily for personal, family unit, or household purposes."Compatible Commercial Code, Section 9-102(a)(48).

Inventory

"Goods, other than subcontract products, held by a person for auction or lease or consisting of raw materials, works in progress, or material consumed in a business."Compatible Commercial Code, Section 9-102(a)(48).

Farm Products

"Crops, livestock, or other supplies produced or used in farming operations," including aquatic appurtenances produced in aquaculture.Uniform Commercial Code, Section ix-102(a)(34).

Equipment

This is the residual category, defined as "goods other than inventory, farm products, or consumer goods."Compatible Commercial Code, Section 9-102(a)(33).

Accounts

This type of intangible property includes accounts receivable (the right to payment of coin), insurance policy proceeds, free energy provided or to exist provided, winnings in a lottery, health-intendance-insurance receivables, promissory notes, securities, letters of credit, and interests in business entities.Uniform Commercial Code, Department 9-102(a)(2). Often there is something in writing to bear witness the existence of the right—such as a right to receive the proceeds of somebody else's insurance payout—but the writing is merely evidence of the right. The paper itself doesn't have to be delivered for the transfer of the right to exist effective; that's done past assignment.

Other Types of Collateral

Among possible other types of collateral that may exist used every bit security is the floating lien.A lien that is expanded to embrace any boosted property that is acquired by the debtor while the debt is outstanding. This is a security interest in property that was not in the possession of the debtor when the security understanding was executed. The floating lien creates an interest that floats on the river of nowadays and hereafter collateral and proceeds held by—most often—the business debtor. It is particularly useful in loans to businesses that sell their collateralized inventory. Without the floating lien, the lender would notice its collateral steadily depleted equally the borrowing business organisation sells its products to its customers. Pretty soon, there'd be no security at all. The floating lien includes the post-obit:

• Later-caused belongings. This is property that the debtor acquires after the original deal was ready up. It allows the secured party to enhance his security as the debtor (obligor) acquires more than property subject to collateralization.
• Sale proceeds. These are proceeds from the disposition of the collateral. Carl Creditor takes a secured interest in Deborah Debtor's sailboat. She sells the boat and buys a garden tractor. The secured interest attaches to the garden tractor.

Zipper of a Security Interest

Attachment is the term used to depict when a security involvement becomes enforceable against the debtor with respect to the collateral. In the "The Grasping Hand" figure in a higher place, "Attachment" is the outreached hand that is prepared, if the debtor defaults, to grasp the collateral.

There are iii requirements for attachment: (1) the secured political party gives value; (2) the debtor has rights in the collateral or the power to transfer rights in it to the secured political party; (iii) the parties accept a security agreement "authenticated" (signed) by the debtor, or the creditor has possession of the collateral.

The creditor, or secured party, must give "value" for the security involvement to adhere. Typically this is extending credit to the debtor. The debtor must have rights in the collateral. Most usually, the debtor owns the collateral (or has some ownership interest in it). The rights need not necessarily be the immediate right to possession, but they must be rights that tin can be conveyed.^[5] A person can't put upward as collateral property she doesn't ain.

The debtor well-nigh often signs the written security agreement, or contract. The UCC says that "the debtor [must accept] authenticated a security agreement that provides a clarification of the collateral.…" "Authenticating" (or "signing," "adopting," or "accepting") means to sign or, in recognition of electronic commercial transactions, "to execute or otherwise prefer a symbol, or encrypt or similarly process a tape…with the nowadays intent of the authenticating person to identify the person and adopt or take a tape." The "record" is the modernistic UCC's exchange for the term "writing." It includes information electronically stored or on paper. The "authenticating record" (the signed security agreement) is not required in some cases. Information technology is non required if the debtor makes a of the collateral—that is, delivers it to the creditor for the creditor to possess.

Perfection of a Security Involvement

Equally betwixt the debtor and the creditor, attachment is fine: if the debtor defaults, the creditor volition reclaim the goods and—usually—sell them to satisfy the outstanding obligation. Merely unless an additional set of steps is taken, the rights of the secured party might be subordinated to the rights of other secured parties, certain lien creditors, bankruptcy trustees, and buyers who give value and who do not know of the security interest. Perfection is the secured party's style of announcing the security interest to the rest of the world. It is the secured party'south claim on the collateral.

At that place are five means a creditor may perfect a security interest: (one) by filing a financing statement, (2) by taking or retaining possession of the collateral, (3) by taking command of the collateral, (4) by taking control temporarily equally specified by the UCC, or (5) by taking control automatically.

"Except as otherwise provided…a financing statement must be filed to perfect all security agreements."^[6]A financing argument is a simple find showing the creditor'due south general involvement in the collateral. Information technology is what'south filed to establish the creditor's "dibs."

It may consist of the security agreement itself, equally long as information technology contains the data required by the UCC, just most ordinarily it is much less detailed than the security understanding: it "indicates merely that a person may have a security interest in the collateral[.]…Further inquiry from the parties concerned volition be necessary to disclose the full situation."^[seven] The financing statement must provide the following information:

• The debtor's name. Financing statements are indexed nether the debtor's name, so getting that correct is important. Section 9-503 of the UCC describes what is meant by "name of debtor."
• The secured party's proper name.
• An "indication" of what collateral is covered by the financing argument.Uniform Commercial Code, Section 9-502(a). It may describe the collateral or it may "bespeak that the financing statement covers all assets or all personal holding" (such generic references are not acceptable in the security understanding simply are OK in the financing argument).^[8] If the collateral is real-property-related, covering timber to exist cut or fixtures, it must include a description of the real holding to which the collateral is related.

The form of the financing statement may vary from state to country, just see the "UCC-1 Financing Statement" Figure for a typical financing statement. Minor errors or omissions on the form will not make it ineffective, just the debtor's signature is required unless the creditor is authorized by the debtor to make the filing without a signature, which facilitates paperless filing.

A UCC Financing Statement

Generally, the financing statement is effective for five years; a continuation statement may be filed within vi months before the v-twelvemonth expiration date, and it is skilful for some other five years. The UCC likewise has rules for continued perfection of security interests when the debtor—whether an individual or an association (corporation)—moves from one state to another. Generally, an interest remains perfected until the earlier of when the perfection would take expired or for four months afterwards the debtor moves to a new jurisdiction. For about existent-estate-related filings—ore to be extracted from mines, agricultural collateral, and fixtures—the place to file is with the local office that files mortgages, typically the county accountant'due south office.^[nine] For other collateral, the filing place is equally duly authorized by the state. In some states, that is the office of the Secretary of State; in others, it is the Department of Licensing; or it might be a private political party that maintains the state's filing organisation.^[10] The filing should be made in the land where the debtor has his or her primary residence for individuals, and in the state where the debtor is organized if it is a registered organization.^[eleven] The point is, creditors need to know where to look to see if the collateral offered up is already encumbered. In any outcome, filing the statement in more than i place tin't hurt. The filing office will provide instructions on how to file; these are available online, and electronic filing is usually bachelor for at least some types of collateral.

Exemptions

Some transactions are exempt from the filing provision. The virtually important category of exempt collateral is that covered by state certificate of title laws. For example, many states require automobile owners to obtain a certificate of title from the land motor vehicle office. Most of these states provide that it is not necessary to file a financing argument in order to perfect a security interest in an motorcar. The reason is that the motor vehicle regulations require any security interests to be stated on the championship, and so that anyone attempting to purchase a machine in which a security interest had been created would be on notice when he took the actual title certificate.^[12]

Temporary Perfection

The UCC provides that sure types of collateral are automatically perfected but only for a while: "A security interest in certificated securities, or negotiable documents, or instruments is perfected without filing or the taking of possession for a period of twenty days from the fourth dimension it attaches to the extent that it arises for new value given under an authenticated security agreement."^[thirteen] Similar temporary perfection covers negotiable documents or goods in possession of a bailee, and when a security certificate or instrument is delivered to the debtor for auction, exchange, presentation, collection, enforcement, renewal, or registration.^[14]Afterward the twenty-day period, perfection would accept to exist by i of the other methods mentioned here.

Perfection by Possession

A secured party may perfect the security interest by possession where the collateral is negotiable documents, appurtenances, instruments, money, tangible chattel paper, or certified securities.^[15] This is a pledge of assets (mentioned in the example of the postage collection). No security agreement is required for perfection by possession.

Automatic Perfection

The 5th mechanism of perfection is addressed in Section 9-309 of the UCC: there are several circumstances where a security interest is perfected upon mere zipper. The about important hither is of a purchase-money security interest given in consumer goods. If a seller of consumer appurtenances takes a PMSI in the goods sold, then perfection of the security interest is automatic. But the seller may file a financial statement and faces a chance if he fails to file and the consumer debtor sells the appurtenances. Under Section 9-320(b), a buyer of consumer goods takes free of a security interest, fifty-fifty though perfected, if he buys without knowledge of the interest, pays value, and uses the goods for his personal, family, or household purposes—unless the secured party had first filed a financing statement roofing the appurtenances.

Attachment and perfection

Priorities

Priorities: this is the coin question.^[16] Who gets what when a debtor defaults? Depending on how the priorities in the collateral were established, even a secured creditor may walk away with the collateral or with null. Here we take up the general rule and the exceptions.

Generally, the first to perfect gets commencement claim on the collateral, and then the showtime to attach among unperfected parties. If both parties accept perfected, the first to perfect wins. If one has perfected and one attached, the perfected party wins. If both accept attached without perfection, the first to attach wins. If neither has attached, they are unsecured creditors. Let's test this general rule against the post-obit situations:

• Rosemary, without having yet lent money, files a financing statement on Feb one covering certain collateral owned by Susan—Susan'southward fur coat. Under UCC Article ix, a filing may be made before the security interest attaches. On March 1, Erika files a like statement, also without having lent any money. On April 1, Erika loans Susan $1,000, the loan being secured by the fur coat described in the statement she filed on March i. On May 1, Rosemary as well loans Susan $1,000, with the same fur coat as security. Who has priority? Rosemary does, since she filed first, even though Erika really first extended the loan, which was perfected when made (because she had already filed). This consequence is dictated by the dominion even though Rosemary may take known of Erika's interest when she later on made her loan.
• Susan cajoles both Rosemary and Erika, each unknown to the other, to loan her $1,000 secured past the fur glaze, which she already owns and which hangs in her coat closet. Erika gives Susan the money a week afterward Rosemary, merely Rosemary has non perfected and Erika does non either. A week afterwards, they find out they have each made a loan against the same coat. Who has priority? Whoever perfects outset: the rule creates a race to the filing part or to Susan's closet. Whoever tin can submit the financing statement or actually take possession of the coat offset will accept priority, and the outcome does not depend on knowledge or lack of noesis that someone else is claiming a security involvement in the aforementioned collateral. But what of the rule that in the absenteeism of perfection, whichever security interest outset attached has priority? This is "thought to exist of merely theoretical interest," says the UCC commentary, "since it is difficult to imagine a situation where the case would come into litigation without [either party] having perfected his interest." And if the debtor filed a petition in bankruptcy, neither unperfected security interest could prevail against the defalcation trustee.

To rephrase: An attached security interest prevails over other unsecured creditors (unsecured creditors lose to secured creditors, perfected or unperfected). If both parties are secured (have attached the involvement), the first to perfect wins.^[17] If both parties have perfected, the showtime to take perfected wins.^[eighteen]

Exemptions

The UCC provides that "a perfected purchase-money security interest in appurtenances other than inventory or livestock has priority over a conflicting security interest in the aforementioned goods…if the purchase-coin security involvement is perfected when debtor receives possession of the collateral or within 20 days thereafter."^[19]The Official Comment to this UCC department observes that "in most cases, priority will be over a security interest asserted under an after-acquired property clause."

Suppose Susan manufactures fur coats. On February i, Rosemary advances her $10,000 under a security understanding covering all Susan's machinery and containing an subsequently-acquired property clause. Rosemary files a financing argument that aforementioned 24-hour interval. On March ane, Susan buys a new machine from Erika for $5,000 and gives her a security interest in the machine; Erika files a financing argument within xx days of the fourth dimension that the machine is delivered to Susan. Who has priority if Susan defaults on her loan payments? Under the PMSI rule, Erika has priority, because she had a PMSI. Suppose, yet, that Susan had not bought the machine from Erika but had merely given her a security interest in it. And so Rosemary would have priority, because her filing was prior to Erika'southward.

What would happen if this kind of PMSI in noninventory goods (here, equipment) did non go priority status? A prudent Erika would non extend credit to Susan at all, and if the new machine is necessary for Susan's business organisation, she would shortly be out of business organization. That certainly would not inure to the do good of Rosemary. It is, mostly, to Rosemary's advantage that Susan gets the machine: information technology enhances Susan's ability to make money to pay Rosemary.

The UCC also provides that a perfected PMSI in inventory has priority over conflicting interests in the aforementioned inventory, provided that the PMSI is perfected when the debtor receives possession of the inventory, the PMSI-secured party sends an authenticated notification to the holder of the conflicting interest and that person receives the observe within five years before the debtor receives possession of the inventory, and the notice states that the person sending it has or expects to acquire a PMSI in the inventory and describes the inventory.^[20] The notice requirement is aimed at protecting a secured party in the typical situation in which incoming inventory is subject to a prior agreement to make advances against information technology. If the original creditor gets notice that new inventory is subject to a PMSI, he volition exist forewarned against making an advance on information technology; if he does non receive discover, he will take priority. It is commonly to the earlier creditor's reward that her debtor is able to get credit to "floor" (provide) inventory, without selling which, of course, the debtor cannot pay back the earlier creditor.

Now we wait at buyers who have priority over perfected security interests. Sometimes people who buy things even covered by a perfected security interest win out (the perfected secured party loses). "A buyer in the ordinary grade of business, other than [one buying farm products from somebody engaged in farming] takes free of a security interest created by the buyer'southward seller, even if the security interest is perfected and the buyer knows [it]."^[21]

Rights of Creditor on Default and Disposition after Repossession

Upon default, the creditor must make an ballot: to sue, or to repossess.

Resort to Judicial Process

After a debtor'due south default (due east.thousand., past missing payments on the debt), the creditor could ignore the security interest and bring arrange on the underlying debt. But creditors rarely resort to this remedy because it is time-consuming and plush. Most creditors prefer to repossess the collateral and sell it or retain possession in satisfaction of the debt.

Repossession

Department 9-609 of the Uniform Commercial Code (UCC) permits the secured political party to take possession of the collateral on default (unless the agreement specifies otherwise):

(a) After default, a secured party may (1) take possession of the collateral; and (2) without removal, may render equipment unusable and dispose of collateral on a debtor's premises.

(b) A secured party may go along nether subsection (a): (i) pursuant to judicial process; or (ii) without judicial process, if it gain without breach of the peace.

This language has given rise to the flourishing business organisation of professional person "repo men" (and women). "Repo" companies are firms that specialize in repossession collateral. They have trained car-lock pickers, in-house locksmiths, experienced repossession teams, damage-free towing equipment, and the capacity to evangelize repossessed collateral to the client's desired destination. Some firms advertise that they accept 360-caste video cameras that tape every aspect of the repossession. They take "skip chasers"—people whose business it is to runway down those who skip out on their obligations, and they are trained not to breach the peace.

The creditor'southward agents—the repo people—charge for their service, of form, and if possible the cost of repossession comes out of the collateral when it's sold. A debtor would be better off voluntarily delivering the collateral co-ordinate to the creditor'southward instructions, but if that doesn't happen, "self-assistance"—repossession—is immune because, of course, the debtor said it would exist allowed in the security agreement, so long equally the repossession can be achieved without breach of peace. "Breach of peace" is language that tin cover a wide variety of situations over which courts do not ever agree. For example, some courts interpret a creditor'south taking of the collateral despite the debtor's clear oral protest as a breach of the peace; other courts do not.

Disposition after Repossession

Afterward repossession, the creditor has two options: sell the collateral or accept information technology in satisfaction of the debt. Sale is the usual method of recovering the debt. Department ix-610 of the UCC permits the secured creditor to "sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following whatever commercially reasonable preparation or processing." The collateral may be sold as a whole or in parcels, at i fourth dimension or at unlike times. Two requirements limit the creditor's ability to resell: (1) it must send notice to the debtor and secondary obligor, and (unless consumer goods are sold) to other secured parties; and (2) all aspects of the auction must be "commercially reasonable."

Section ix-615 of the UCC describes how the proceeds are applied: first, to the costs of the repossession, including reasonable attorney's fees and legal expenses every bit provided for in the security understanding (and it will provide for that!); second, to the satisfaction of the obligation owed; and 3rd, to junior creditors. This once again emphasizes the importance of promptly perfecting the security interest: failure to do and so oft subordinates the tardy creditor's interest to inferior status. If in that location is money left over from disposing of the collateral—a surplus—the debtor gets that back. If at that place is still money owing—a deficiency—the debtor is liable for that. In Department 9-616, the UCC carefully explains how the surplus or deficiency is calculated; the caption is required in a consumer goods transaction, and it has to be sent to the debtor after the disposition.

Because resale can be a carp (or the collateral is affectionate in value), the secured creditor may wish simply to take the collateral in total satisfaction or partial satisfaction of the debt, as permitted in UCC Department nine-620(a). This is known every bit strict foreclosure. The debtor must consent to letting the creditor take the collateral without a auction in a "record authenticated after default," or afterwards default the creditor can send the debtor a proposal for the creditor to take the collateral, and the proposal is effective if non objected to within twenty days afterward it'due south sent.

The strict foreclosure provisions contain a rubber feature for consumer goods debtors. If the debtor has paid at least 60 percent of the debt, then the creditor may not employ strict foreclosure—unless the debtor signs a statement after default renouncing his right to bar strict foreclosure and to force a sale.

Introduction to Bankruptcy and Chapter seven Liquidation

History of Defalcation

Bankruptcy law governs the rights of creditors and insolvent debtors who cannot pay their debts. In broadest terms, bankruptcy deals with the seizure of the debtor'southward assets and their distribution to the debtor's diverse creditors. The term derives from the Renaissance custom of Italian traders, who did their trading from benches in town marketplaces. Creditors literally "broke the demote" of a merchant who failed to pay his debts. The term banco rotta (cleaved bench) thus came to apply to business organisation failures.

In the Victorian era, many people in both England and the United States viewed someone who became broke every bit a wicked person. In role, this mental attitude was prompted past the constabulary itself, which to a greater degree in England and to a lesser caste in the U.s. treated the insolvent debtor as a sort of felon. Until the 2nd half of the nineteenth century, British insolvents could exist imprisoned; jail for insolvent debtors was abolished earlier in the United States. And the entire assistants of bankruptcy law favored the creditor, who could with a mere filing throw the fiscal affairs of the declared insolvent into complete disarray.

Today a different attitude prevails. Defalcation is understood as an aspect of financing, a organization that permits creditors to receive an equitable distribution of the bankrupt person's assets and promises new hope to debtors facing impossible financial burdens. Without such a law, we may reasonably suppose that the level of economical activity would be far less than information technology is, for few would be willing to take a chance existence personally burdened forever by burdensome debt. Defalcation gives the honest debtor a fresh start and resolves disputes among creditors.

The BAPCPA provides for half dozen unlike kinds of defalcation proceedings. Each is covered by its own chapter in the act and is usually referred to by its chapter number. We will consider only three.

Bankruptcy Options

• Chapter 7, Liquidation: applies to all debtors except railroads, insurance companies, nigh banks and credit unions, and homestead associations.eleven U.s. Code, Section 109(b). A liquidation is a "straight" bankruptcy proceeding. It entails selling the debtor's nonexempt assets for cash and distributing the cash to the creditors, thereby discharging the insolvent person or business from whatever further liability for the debt. About 70 percent of all defalcation filings are Chapter 7.
• Chapter 11, Reorganization: applies to anybody who could file Chapter seven, plus railroads. It is the means past which a financially troubled company can continue to operate while its financial diplomacy are put on a sounder ground. A business might liquidate following reorganization but volition probably take on new life after negotiations with creditors on how the old debt is to be paid off. A company may voluntarily decide to seek Chapter 11 protection in court, or it may be forced involuntarily into a Chapter 11 proceeding.
• Chapter 13, Adjustment of debts of an individual with regular income: applies only to individuals (no corporations or partnerships) with debt not exceeding about $1.3 1000000.eleven U.s. Code, Section 109(e). This chapter permits an individual with regular income to constitute a repayment plan, usually either a limerick (an agreement among creditors) or an extension (a stretch-out of the time for paying the entire debt).

Chapter 7

The basic idea in Affiliate seven is to sell the debtor's non-exempt assets (so they, e.g., may retain their home), pay off the creditors in a sensible priority order (due east.g., secured creditors starting time), and then to discharge the remaining debts. There are some details.

Recall that the purpose of liquidation is to convert the debtor's avails—except those exempt under the police—into cash for distribution to the creditors and thereafter to discharge the debtor from further liability. With certain exceptions, any person may voluntarily file a petition to liquidate under Chapter 7. A "person" is defined as whatsoever individual, partnership, or corporation. The exceptions are railroads and insurance companies, banks, savings and loan associations, credit unions, and the like.

For a Chapter 7 liquidation proceeding, as for bankruptcy proceedings in general, the various aspects of case assistants are covered by the bankruptcy lawmaking's Chapter three. These include the rules governing first of the proceedings, the effect of the petition in bankruptcy, the first meeting of the creditors, and the duties and powers of trustees.

The bankruptcy begins with the filing of a petition in bankruptcy with the bankruptcy court.

Voluntary and Involuntary Petitions

The individual, partnership, or corporation may file a voluntary petition in bankruptcy; 99 pct of bankruptcies are voluntary petitions filed by the debtor. Only involuntary bankruptcy is possible, also, under Chapter seven or Chapter xi. To put anyone into bankruptcy involuntarily, the petitioning creditors must meet iii conditions: (1) they must have claims for unsecured debt amounting to at least a statutory amount (around $sixteen,000 as of this writing); (2) three creditors must join in the petition whenever twelve or more than creditors have claims confronting the particular debtor—otherwise, one creditor may file an involuntary petition, every bit long as his claim is for at least a statutory amount; (three) at that place must exist no bona fide dispute nigh the debt owing. If there is a dispute, the debtor can resist the involuntary filing, and if she wins the dispute, the creditors who pushed for the involuntary petition accept to pay the associated costs. Persons owing less than the statutory corporeality, farmers, and charitable organizations cannot be forced into bankruptcy.

The Automated Stay

The petition—voluntary or otherwise—operates as a stay. Upon filing the defalcation, an automated injunction that halts actions past creditors to collect debts. against suits or other actions against the debtor to recover claims, enforce judgments, or create liens (but non alimony collection). In other words, one time the petition is filed, the debtor is freed from worry over other proceedings affecting her finances or property. No more than debt drove calls! Anyone with a claim, secured or unsecured, must seek relief in the bankruptcy courtroom. This provision in the act can have dramatic consequences. Beset by tens of thousands of products-liability suits for amercement caused by asbestos, UNR Industries and Manville Corporation, the nation'southward largest asbestos producers, filed (split up) voluntary bankruptcy petitions in 1982; those filings automatically stayed all pending lawsuits.

Holding Included in the Estate

When a bankruptcy petition is filed, a debtor's manor is created consisting of all the debtor's then-existing holding interests, whether legal or equitable. In addition, the estate includes any bequests, inheritances, and certain other distributions of property that the debtor receives within the next 180 days. It also includes property recovered by the trustee nether sure powers granted by the constabulary. What is not exempt property will be distributed to the creditors.

Trustee's Powers and Duties

The human action empowers the trustee to utilize, sell, or lease the debtor'south property in the ordinary form of business or, after detect and a hearing, even if not in the ordinary course of business organisation. In all cases, the trustee must protect whatsoever security interests in the property. As long as the court has authorized the debtor'south business concern to go on, the trustee may too obtain credit in the ordinary form of concern. She may invest money in the estate to yield the maximum, but reasonably condom, render. Discipline to the courtroom's blessing, she may employ diverse professionals, such as attorneys, accountants, and appraisers, and may, with some exceptions, presume or reject executory contracts and unexpired leases that the debtor has made. The trustee also has the power to avert many prebankruptcy transactions in order to recover belongings of the debtor to be included in the liquidation.

Another ability is to avoid transactions known every bit voidable preferences—transactions highly favorable to particular creditors.^[22] A transfer of property is voidable if information technology was made (i) to a creditor or for his do good, (2) on account of a debt owed earlier the transfer was fabricated, (3) while the debtor was insolvent, (4) on or inside ninety days before the filing of the petition, and (5) to enable a creditor to receive more than he would have nether Chapter 7. If the creditor was an "insider"—ane who had a special relationship with the debtor, such as a relative or general partner of the debtor or a corporation that the debtor controls or serves in as director or officer—then the trustee may void the transaction if information technology was made within one year of the filing of the petition, assuming that the debtor was insolvent at the time the transaction was made.

A third power of the trustee is to avoid fraudulent transfers fabricated within 2 years earlier the engagement that the bankruptcy petition was filed. This provision contemplates various types of fraud. For example, while insolvent, the debtor might transfer property to a relative for less than information technology was worth, intending to recover it after discharge. This situation should exist distinguished from the voidable preference just discussed, in which the debtor pays a favored creditor what he really owes merely in so doing cannot and then pay other creditors.

In improver to the duties already noted, the trustee has other duties under Chapter 7. He must sell the property for money, close up the estate "as expeditiously as is compatible with the all-time interests of parties in interest," investigate the debtor's financial affairs, examine proofs of claims, pass up improper ones, oppose the discharge of the debtor where doing so is advisable in the trustee's stance, furnish a creditor with information about the estate and his administration (unless the court orders otherwise), file tax reports if the business continues to exist operated, and make a final report and file it with the court.

Claims with Priority

The bankruptcy act sets out categories of claimants and establishes priorities among them. The constabulary is complex because it sets up dissimilar orders of priorities.

Get-go, secured creditors become their security interests before anyone else is satisfied, because the security interest is not part of the property that the trustee is entitled to bring into the estate. This is why being a secured creditor is important, as discussed earlier in this chapter. To the extent that secured creditors have claims in excess of their collateral, they are considered unsecured or general creditors and are lumped in with full general creditors of the appropriate class.

Second, of the six classes of claimants, the first is known as that of "priority claims." Information technology is subdivided into ten categories ranked in social club of priority. The highest-priority class within the general class of priority claims must be paid off in full before the next class can share in a distribution from the manor, then on. Within each class, members volition share pro rata if there are non plenty assets to satisfy everyone fully. The priority classes, from highest to lowest, are set out in the bankruptcy code (11 USC Section 507) as follows (in part):

• Domestic support obligations ("DSO"), which are claims for support due to the spouse, former spouse, child, or child'southward representative, and at a lower priority within this grade are whatever claims by a governmental unit of measurement that has rendered support assistance to the debtor'southward family obligations.
• Authoritative expenses that are required to administer the defalcation case itself. Since trustees are paid from the bankruptcy estate, the courts have allowed de facto summit priority for authoritative expenses because no trustee is going to administer a bankruptcy case for nothing (and no lawyer will work for long without getting paid, either).
• Gap creditors. Claims made by gap creditors in an involuntary defalcation petition nether Affiliate 7 or Chapter eleven are those that ascend between the filing of an involuntary bankruptcy petition and the order for relief issued past the court. These claims are given priority because otherwise creditors would not deal with the debtor, unremarkably a concern, when the business has declared defalcation but no trustee has been appointed and no order of relief issued.
• Employee wages upwardly to a statutory amount for each worker, for the 180 days previous to either the defalcation filing or when the business ceased operations, whichever is earlier (180-day flow).
• Unpaid contributions to employee benefit plans during the 180-day period, but limited by what was already paid by the employer under subsection (iv) higher up plus what was paid on behalf of the employees by the bankruptcy estate for any employment do good program.
• Consumer deposits
• Taxes owed to federal, state, and local governments
• Claims for death or personal injury based on DUI's

Debtor's Exemptions

The defalcation act exempts certain belongings of the estate of an individual debtor so that he or she volition non be impoverished upon discharge. Exactly what is exempt depends on state law.

Notwithstanding the Constitution'south mandate that Congress establish "uniform laws on the subject of bankruptcies," defalcation constabulary is in fact not uniform considering the states persuaded Congress to let nonuniform exemptions. The concept makes sense: what is necessary for a debtor in Maine to alive a nonimpoverished postbankruptcy life might not be the aforementioned as what is necessary in southern California. These typically include some value in a homestead, some value in a motor vehicle, a certain value of household goods, burial plots, pensions, tools of one's trade, and so on.

Dischargeable debts

One time discharged, the debtor is no longer legally liable to pay whatever remaining unpaid debts (except nondischargeable debts) that arose before the court issued the gild of relief. The discharge operates to void any money judgments already rendered against the debtor and to bar the judgment creditor from seeking to recover the judgment.

Some debts are not dischargeable in bankruptcy. A bankruptcy discharge varies, depending on the type of bankruptcy the debtor files (Affiliate 7, eleven, 12, or 13). The most mutual nondischargeable debts listed in Section 523 include the following:

• All debts not listed in the bankruptcy petition
• Student loans—unless it would be an undue hardship to repay them
• Taxes—federal, land, and municipal
• Fines for violating the police, including criminal fines and traffic tickets
• Alimony and child support, divorce, and other property settlements
• Debts for personal injury acquired by driving, boating, or operating an aircraft while intoxicated
• Consumer debts owed to a single creditor and aggregating more than $550 for luxury goods or services incurred inside xc days before the social club of relief
• Debts incurred considering of fraud or securities police force violations
• Debts for willful injury to another'southward person or his or her property
• Debts from embezzlement

Distribution of the Estate

Chapter 11 and Chapter thirteen Bankruptcies

Affiliate 11

Chapter eleven provides a means past which corporations, partnerships, and other businesses, including sole proprietorships, tin rehabilitate themselves and continue to operate free from the burden of debts that they cannot pay.

Any person eligible for discharge in Chapter seven proceeding (plus railroads) is eligible for a Chapter 11 proceeding, except stockbrokers and commodity brokers. Individuals filing Affiliate 11 must take credit counseling; businesses do not. A company may voluntarily enter Affiliate 11 or may exist put there involuntarily by creditors. Individuals tin file Chapter xi particularly if they take too much debt to qualify for Affiliate xiii and make as well much money to qualify for Chapter seven; under the 2005 act, individuals must commit time to come wages to creditors, just every bit in Chapter 13.

Unless a trustee is appointed, the debtor will retain possession of the business and may continue to operate with its own management. The court may appoint a trustee on request of any party in involvement later notice and a hearing. The appointment may be fabricated for cause—such as dishonesty, incompetence, or gross mismanagement—or if it is otherwise in the best interests of the creditors. Oft, the aforementioned incompetent management that got the business organisation into defalcation is left running it—that's a criticism of Chapter 11.

The courtroom must appoint a committee of unsecured creditors as soon every bit practicable after issuing the order for relief. The commission must consist of creditors willing to serve who accept the seven largest claims, unless the court decides to go on a committee formed before the filing, if the committee was fairly chosen and adequately represents the various claims. The committee has several duties, including these: (ane) to investigate the debtor's financial affairs, (two) to decide whether to seek appointment of a trustee or to permit the business concern go along to operate, and (3) to consult with the debtor or trustee throughout the instance.

The Reorganization Programme

The debtor may always file its own programme, whether in a voluntary or involuntary case. If the court leaves the debtor in possession without appointing a trustee, the debtor has the exclusive correct to file a reorganization plan during the beginning 120 days. If it does file, information technology volition then accept another 60 days to obtain the creditors' acceptances. Although its exclusivity expires at the finish of 180 days, the court may lengthen or shorten the flow for practiced crusade. At the end of the exclusive menstruation, the creditors' committee, a single creditor, or a holder of disinterestedness in the debtor's property may file a plan. If the court does appoint a trustee, any party in interest may file a plan at whatsoever fourth dimension.

The Bankruptcy Reform Act specifies certain features of the plan and permits others to exist included. Among other things, the program must (1) designate classes of claims and ownership interests; (2) specify which classes or interests are impaired—a merits or ownership interest is impaired if the creditor's legal, equitable, contractual rights are altered under the plan; (3) specify the treatment of any course of claims or interests that is impaired nether the plan; (iv) provide the aforementioned handling of each merits or interests of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment; and (5) provide adequate means for carrying out the plan. Basically, what the plan does is provide a process for rehabilitating the company's faltering business by relieving it from repaying part of its debt and initiating reforms then that the company tin try to become back on its anxiety.

The debtor gets discharged when all payments under the programme are completed. A Chapter xi bankruptcy may exist converted to Chapter 7, with some restrictions, if it turns out the debtor cannot brand the plan work.

Chapter xiii

Anyone with a steady income who is having difficulty paying off accumulated debts may seek the protection of a defalcation courtroom in Chapter thirteen proceeding (oftentimes called the wage earner'southward plan). Under this chapter, the individual debtor presents a payment programme to creditors, and the court appoints a trustee. If the creditors wind upward with more under the plan presented than they would receive in Affiliate seven proceeding, then the court is likely to corroborate information technology. In general, a Chapter xiii repayment program extends the time to pay the debt and may reduce it so that the debtor demand not pay it all. Typically, the debtor will pay a fixed sum monthly to the trustee, who will distribute it to the creditors.

People seek Chapter 13 discharges instead of Affiliate 7 for various reasons: they make too much coin to pass the Chapter 7 ways test; they are behind on their mortgage or auto payments and want to make them upwards over time and reinstate the original understanding; they have debts that tin't exist discharged in Chapter vii; they accept nonexempt property they want to keep; they take codebtors on a personal debt who would exist liable if the debtor went Chapter vii; they accept a real desire to pay their debts merely cannot practise so without getting the creditors to give them some breathing room. Affiliate 7 cases may always exist converted to Chapter 13.

Plans are typically extensions or compositions—that is, they extend the time to pay what is owing, or they are agreements among creditors each to accept something less than the full amount owed (so that all get something). Under Chapter xiii, the stretch-out menses is three to five 3 years. The plan must provide for payments of all future income or a sufficient portion of it to the trustee. Priority creditors are entitled to exist paid in full, although they may be paid afterward than required under the original indebtedness. As long as the plan is being carried out, the debtor may enjoin any creditors from suing to collect the original debt.

One time a debtor has made all payments chosen for in the plan, the courtroom volition discharge him from all remaining debts except sure long-term debts and obligations to pay pension, maintenance, and support.

A debtor with sufficient income (calculated by a test across our scope) who files for Chapter seven bankruptcy may have their proceedings converted to Chapter 13, which would enable them to pay their creditors additional sums.

Summary and Exercises

The constabulary governing security interests in personal property is Article 9 of the UCC, which defines a security interest as an interest in personal belongings or fixtures that secures payment or performance of an obligation. Article nine lumps together all the sometime types of security devices, including the pledge, chattel mortgage, and conditional sale.

Five types of tangible property may serve as collateral: (1) consumer appurtenances, (2) equipment, (three) farm products, (4) inventory, and (5) fixtures. To create an enforceable security interest, the lender and borrower must enter into an understanding establishing the involvement, and the lender must follow steps to ensure that the security involvement first attaches so is perfected. There are three general requirements for attachment: (ane) there must be an authenticated agreement (or the collateral must physically be in the lender'due south possession), (2) the lender must accept given value, and (3) the debtor must have some rights in the collateral. Once the interest attaches, the lender has rights in the collateral superior to those of unsecured creditors. But others may defeat his interest unless he perfects the security involvement. The three common ways of doing so are (1) filing a financing argument, (2) pledging collateral, and (three) taking a purchase-money security interest (PMSI) in consumer goods.

A financing statement is a simple notice, showing the parties' names and addresses, the signature of the debtor, and an adequate description of the collateral. The financing statement, constructive for five years, must exist filed in a public office; the location of the office varies among u.s..

The general priority rule is "start in time, offset in correct." Priority dates from the earlier of 2 events: (1) filing a financing statement covering the collateral or (ii) other perfection of the security involvement. Several exceptions to this rule arise when creditors accept a PMSI, among them, when a buyer in the ordinary form of business organization takes free of a security interest created by the seller.

On default, a creditor may repossess the collateral. For the most part, cocky-help individual repossession continues to be lawful but risky. After repossession, the lender may sell the collateral or accept information technology in satisfaction of the debt. Any excess in the selling price higher up the debt amount must go to the debtor.

The Constitution gives Congress the power to legislate on defalcation. The current law is the Bankruptcy Corruption Prevention and Consumer Protection Act of 2005, which provides for six types of proceedings: (1) liquidation, Chapter 7; (ii) aligning of debts of a municipality, Chapter 9; (3) reorganization, Chapter eleven; (4) family farmers with regular income, Chapter 12; (5) individuals with regular income, Chapter 13; and (six) cross-border bankruptcies, Chapter xv.

With some exceptions, any individual, partnership, or corporation seeking liquidation may file a voluntary petition in defalcation. An involuntary petition is as well possible; creditors petitioning for that must come across sure criteria.

A petition operates equally a stay confronting the debtor for lawsuits to recover claims or enforce judgments or liens. A judge will issue an social club of relief and appoint a trustee, who takes over the debtor's property and preserves security interests. To recover monies owed, creditors must file proof of claims. The trustee has certain powers to recover property for the estate that the debtor transferred before defalcation. These include the ability to act as a hypothetical lien creditor, to avoid fraudulent transfers and voidable preferences.

The defalcation act sets out categories of claimants and establishes priority amid them. After secured parties accept their security, the priorities are (1) domestic support obligations, (ii) administrative expenses, (3) gap creditor claims, (four) employees' wages, salaries, commissions, (5) contributions to employee do good plans, (6) grain or fish producers' claims against a storage facility, (7) consumer deposits, (8) taxes owed to governments, (9) immune claims for personal injury or death resulting from debtor's driving or operating a vessel while intoxicated. Afterward these priority claims are paid, the trustee must distribute the estate in this gild: (a) unsecured creditors who filed timely, (b) unsecured creditors who filed belatedly, (c) persons claiming fines and the like, (d) all other creditors, (e) the debtor. Nigh bankruptcies are no-asset, so creditors go cipher.

Under Chapter 7's 2005 amendments, debtors must laissez passer a means test to exist eligible for relief; if they make too much coin, they must file Chapter xiii.

Certain belongings is exempt from the estate of an individual debtor. States may opt out of the federal list of exemptions and substitute their own; virtually have.

Once discharged, the debtor is no longer legally liable for most debts. Nonetheless, some debts are not dischargeable, and bad faith by the debtor may preclude discharge. Under some circumstances, a debtor may reaffirm a discharged debt. A Chapter 7 instance may be converted to Chapter 11 or 13 voluntarily, or to Chapter 11 involuntarily.

Affiliate 11 provides for reorganization. Whatsoever person eligible for belch in Chapter 7 is eligible for Affiliate 11, except stockbrokers and commodity brokers; those who have too much debt to file Affiliate xiii and surpass the means examination for Chapter 7 file Affiliate eleven. Nether Chapter 11, the debtor retains possession of the business and may continue to operate it with its own management unless the courtroom appoints a trustee. The courtroom may practise and then either for cause or if information technology is in the best interests of the creditors. The court must appoint a commission of unsecured creditors, who remain active throughout the proceeding. The debtor may file its own reorganization plan and has the exclusive right to do then within 120 days if it remains in possession. The program must be accepted by certain proportions of each dumb class of claims and interests. Information technology is bounden on all creditors, and the debtor is discharged from all debts once the court confirms the plan.

Affiliate 13 is for any individual with regular income who has difficulty paying debts; it is voluntary only; the debtor must go credit counseling. The debtor presents a payment programme to creditors, and the court appoints a trustee. The plan extends the fourth dimension to pay and may reduce the size of the debt. If the creditors current of air upwards with more in this proceeding than they would have in Affiliate 7, the court is likely to corroborate the plan. The court may corroborate a stretch-out of five years. Some debts not dischargeable nether Chapter 7 may exist under Chapter 13.

1. Kathy Knittle borrowed $20,000 from Bank to buy inventory to sell in her knit shop and signed a security agreement list as collateral the entire nowadays and futurity inventory in the store, including proceeds from the sale of inventory. Bank filed no financing statement. A month later, Knittle borrowed $5,000 from Creditor, who was enlightened of Bank's security involvement. Knittle and then declared defalcation. Who has priority, Bank or Creditor?
2. Assume the same facts as in Exercise 1, except Creditor—again, enlightened of Banking concern's security interest—filed a financing statement to perfect its interest. Who has priority, Depository financial institution or Creditor?
3. Beginning Bank has a security interest in equipment owned by Kathy Knittle in her Knit Shop. If Kathy defaults on her loan and Offset Banking concern lawfully repossesses, what are the bank's options? Explain.
4. First Bank has a security involvement in equipment owned by Kathy Knittle in her Knit Shop. If Kathy defaults on her loan and First Depository financial institution lawfully repossesses, what are the bank'southward options? Explain.

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Source: https://boisestate.pressbooks.pub/buslaw/chapter/secured-transactions-and-bankruptcy/

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