Chapter 16 Business Law

Chapter 12 Bankruptcy

(for family farmers and family fishermen) and Chapter 13 (for individuals) provide for adjustment of the debts of parties with regular income.7

Perfection without filing

-perfection by possession -perfection by attachment

Reaffirmation of Debt

.A debtor may wish to pay a debt—for instance, a debt owed to a family member, physician, bank, or some other creditor—even though the debt could be discharged in bankruptcy. To be enforceable, reaffirmation agreements must be made before the debtor is granted a discharge. The agreement must be signed and filed with the court. Court approval is required unless the debtor is represented by an attorney during the negotiation of the reaffirmation agreement and submits the proper documents and certifications. Even when the debtor is represented by an attorney, court approval may be required if it appears that the reaffirmation will result in undue hardship to the debtor.

Exempted Personal Property

1. Household furniture up to a specified dollar amount. 2. Clothing and certain personal possessions, such as family pictures or a religious text. 3. A vehicle (or vehicles) for transportation (at least up to a specified dollar amount). 4. Certain classified animals, usually livestock but including pets. 5. Equipment that the debtor uses in a business or trade, such as tools or professional instruments, up to a specified dollar amount.

Goals of Bankruptcy Law

1. To protect a debtor by giving him or her a fresh start without creditors' claims. 2. To ensure equitable treatment of creditors who are competing for a debtor's assets.

General Rules of Priority

1. When 2 or more parties have claims to the same collateral, a perfected security interest has priority over non-perfected 2. When there are 2 or more parties with perfected security interests in the same collateral, the first to perfect has priority 3. When 2 or more parties with unperfected security interests conflict, the first to attach (be created) has priority

Actions That Release the Surety and the Guarantor

1. material modification 2. surrender of property 3. payment or tender of payment

Creditor Protection

1. requiring mortgage insurance 2. recording the mortgage 3. including contract provisions

The Reorganization Plan

1.Designate classes of claims and interests. 2.Specify the treatment to be afforded the classes. 3.Provide an adequate means for execution. 4.Provide for payment of tax claims over a five-year period.

Exceptions to Automatic Stay

1.Domestic-support 2.Proceedings related to divorce, child custody, domestic violence, and support enforcement 3.Securities regulatory agency investigations 4.Certain statutory liens for property taxes

Creating a Security Interest

1.Written or authenticated security agreement 2.Secured party must give something of value to debtor 3.Debtor must have "rights" in collateral

Creditors' composition agreement

A contract between a debtor and his or her creditors in which the creditors agree to discharge the debts on the debtor's payment of a sum less than the amount actually owed

Garnishment

A legal process whereby a creditor collects a debt by seizing property of the debtor that is in the hands of a third party.

Fixed Rate Mortgage

A mortgage in which the interest rate does not change during the entire term of the loan.

Mechanic's Lien

A nonpossessory, filed lien on an owner's real estate for labor, services, or materials furnished for making improvements on the realty.

Artisan's Lien

A possessory lien given to a person who has made improvements and added value to another person's personal property as security for payment for services performed.

Cram Down Provision

A provision of the Bankruptcy Code that allows a court to confirm a debtor's Chapter 11 reorganization plan even though only one class of creditors has accepted it.

Surety

A third party who promises to be responsible for a debtor's obligation under a suretyship arrangement.

Voidable Rights

A trustee steps into the shoes of the debtor. Thus, any reason that a debtor can use to obtain the return of his or her property can be used by the trustee as well. The grounds for recovery include fraud, duress, incapacity, and mutual mistake.

Additional Grounds for Dismissal

As noted, a debtor's voluntary petition for Chapter 7 relief may be dismissed for substantial abuse or for failing to provide the necessary documents. A court might also dismiss a Chapter 7 petition if the debtor has been convicted of a violent crime or a drug-trafficking offense. In addition, a motion to dismiss a Chapter 7 petition may be granted if the debtor fails to pay postpetition domestic-support obligations (which include child and spousal support).

Distribution of Property to Unsecured Creditors

Bankruptcy law establishes an order of priority for classes of debts owed to unsecured creditors, and they are paid in the order of their priority. Each class must be fully paid before the next class is entitled to any of the remaining proceeds. If there is any balance remaining after all the creditors are paid, it is returned to the debtor.

Bankruptcy Courts

Bankruptcy proceedings are held in federal bankruptcy courts, which are under the authority of U.S. district courts. Rulings by bankruptcy courts can be appealed to the district courts. The bankruptcy court holds proceedings dealing with the procedures required to administer the debtor's estate in bankruptcy (the debtor's assets, as will be discussed shortly).

involuntary bankruptcy

Bankruptcy that occurs when creditors file a petition with the court against a debtor. 1.If the debtor has twelve or more creditors, three or more of those creditors having unsecured claims totaling at least $15,325 must join in the petition. 2.If a debtor has fewer than twelve creditors, one or more creditors having a claim of $15,325 or more may file.

Distribution of Property to Secured Creditors

If the collateral is surrendered to the secured party, the secured creditor can either (1) accept the collateral in full satisfaction of the debt or (2) sell the collateral and use the proceeds to pay off the debt. Thus, the secured party has priority over unsecured parties as to the proceeds from the disposition of the collateral. Should the collateral be insufficient to cover the secured debt owed, the secured creditor becomes an unsecured creditor for the difference.

order for relief

If the voluntary petition for bankruptcy is found to be proper, the filing of the petition will itself constitute an order for relief. (An order for relief is the court's grant of assistance to a debtor.) Once a consumer-debtor's voluntary petition has been filed, the clerk of the court (or other appointee) must give the trustee and creditors notice of the order for relief by mail not more than twenty days after the entry of the order.

Debtor in Possession

In Chapter 11 bankruptcy proceedings, a debtor who is allowed to continue in possession of the estate in property (the business) and to continue business operations.

Preferences

In bankruptcy proceedings, a property transfer or payment made by the debtor that favors one creditor over others.

Writ of Execution

Is an order that directs the sheriff to seize (levy) and sell any of the debtor's nonexempt real or personal property. The writ applies only to property that is within the court's geographic jurisdiction (usually the county in which the courthouse is located).

Trustee's Powers

The trustee has the power to require persons holding the debtor's property at the time the petition is filed to deliver the property to the trustee. In addition, the trustee has specific powers of avoidance. They enable the trustee to set aside (avoid) a sale or other transfer of the debtor's property and take the property back for the debtor's estate.

Acceptance and Confirmation of the Plan

Once the plan has been developed, it is submitted to each class of creditors for acceptance. For the plan to be adopted, each class must accept it. A class has accepted the plan when a majority of the creditors, representing two-thirds of the amount of the total claim, vote to approve it

Chapter 7 Schedules

The voluntary petition must include a list of the debtor's secured creditors and unsecured creditors, their addresses, and the amount of debt owed to each. It must also include a list of all of the debtor's property, income, and expenses, as well as copies of the debtor's most recent tax returns and certain other information.

Discharge

The plan is binding on confirmation. Nevertheless, the law provides that confirmation of a plan does not discharge an individual debtor. For individual debtors, the plan must be completed before discharge will be granted, unless the court orders otherwise. For all other debtors, the court may order discharge at any time after the plan is confirmed.

Basic Remedies

The secured party can then keep the collateral in full or partial satisfaction of the debt, or can sell, lease, or dispose of the property in any commercially reasonable manner. When the collateral no longer exists or has greatly declined in value, a secured party may choose to relinquish the security interest and use any judicial remedy available (such as obtaining a judgment on the underlying debt).

Exemption to Bankruptcy

Up to $22,975 in equity in the debtor's residence and burial plot (the homestead exemption). Interest in a motor vehicle up to $3,675. Interest, up to $550 for a particular item, in household goods and furnishings, wearing apparel, appliances, books, animals, crops, and musical instruments (the aggregate total of all items is limited to $12,250). Interest in jewelry up to $1,550. Interest in any other property up to $1,225, plus any unused part of the $22,975 homestead exemption up to $11,500. Interest in any tools of the debtor's trade up to $2,300. A life insurance contract owned by the debtor. Certain interests in accrued dividends and interest under life insurance contracts owned by the debtor, not to exceed $12,250. Professionally prescribed health aids. The right to receive Social Security and certain welfare benefits, alimony and support, certain retirement funds and pensions, and education savings accounts held for specific periods of time. The right to receive certain personal-injury and other awards up to $22,975.

Guaranty

With a guaranty arrangement, the guarantor—the third person making the guaranty—is secondarily liable. The guarantor can be required to pay the obligation only after the principal debtor defaults, and default usually takes place only after the creditor has made an attempt to collect from the debtor.

voluntary bankruptcy

With the petition, a consumer-debtor must include a certificate proving that he or she has received credit counseling from an approved agency within the last six months. The debtor must also state in the petition, at the time of filing, that he or she understands the relief available under other chapters of the Code and has chosen to proceed under Chapter 7.

Creditor's Meeting and Claims

Within a reasonable time after the order of relief has been granted (not more than forty days), the trustee must call a meeting of the creditors listed in the schedules filed by the debtor. The bankruptcy judge does not attend this meeting, but the debtor must attend and submit to an examination under oath. At the meeting, the trustee ensures that the debtor is aware of the potential consequences of bankruptcy and the possibility of filing under a different chapter of the Code.

Writ of Attachment

a court-ordered seizure of property before a judgment is secured for a past-due debt.

Adjustable Rate Mortgage

a mortgage whose rate of interest is adjusted periodically to reflect market conditions.

Chapter 11 Bankruptcy

governs reorganizations.

Perfection by Filing a Financing Statement

in a secured transaction , perfecting a creditors security interest in collateral by filing a financing statement in the appropriate government office.

The estate in bankruptcy

includes all of the following: 1. Community property (property jointly owned by a husband and wife in certain states). 2. Property transferred in a transaction voidable by the trustee. 3. Proceeds and profits from the property of the estate.

Mortgage Foreclosure

is the legal process by which the lender repossesses and auctions off the property that has secured the loan.

Automatic Stay

prohibits a creditor from taking any action to collect, assess, or recover a claim against the debtor that arose before the filing of the petition.

Chapter 7 Bankruptcy

provides for liquidation proceedings—that is, the selling of all nonexempt assets and the distribution of the proceeds to the debtor's creditors.

Relief from automatic stay

secured creditor or other party in interest can petition the bankruptcy court for relief from the automatic stay. If a creditor or other party requests relief from the stay, the stay will automatically terminate sixty days after the request, unless the court grants an extension or the parties agree otherwise.

Exempted Real Property

the most familiar real property exemption is the homestead exemption. Each state permits the debtor to retain the family home, either in its entirety or up to a specified dollar amount, free from the claims of unsecured creditors or trustees in bankruptcy.

Fraudulent Transfers

trustee may avoid fraudulent transfers made on or within two years before the date of bankruptcy