Bankruptcy Outline

Bankruptcy — Fall 2013

Korobkin, Rutgers

Non- Bankruptcy Collection

Informal Remedies for Nonpayment of Debt

1. Letter

2. Phone calls

3. Credit reporting

Formal Remedies for Nonpayment of Debt

1. Secured Creditors: Repossession

1. Secured creditor is one who holds a lien (or security interest) on certain property belonging to the debtor that will serve as collateral to secure the debt.

2. Mortgage is a voluntary security interest in real property

3. Security interest is a voluntary lien on personal property

a.Created by execution of a security agreement – Article 9 UCC

b. Lien

PMSI – a lien arises when funds are loaned to purchase the collateral

Non-PMSI – a lien arises when collateral is already owned by D before borrowing (homeowner taps into home equity or gives watch to pawn)

c. Attachment – occurs when lien is created

d. Perfection – occurs when attached lien registered in a public record or by possession of the collateral

2. What does creditor need to do to secure his interest against others?

1. Attachment -creation of the property interest against general unsecured creditors. UCC 9-203(b)

a. Value has been given

1. Value the creditor gives to the debtor – it exists relative to the contractual obligation.

b. Debtor has rights in the collateral

1. Ownership

2. Leasehold

c. Agreement plus one of the following:

1. Written agreement that describes collateral

2. Possession of the collateral

2. Perfection step – makes security interest against the rest of the world

a. Gives public notice to the world that they are taking claim to an interest in the debtors property

1. File financing statement – summary of the transaction filed with the Secretary of the State.

2. Get possession of the property (pledge)

1. Secured party having possession is enough to give notice to third parties who might be thinking about getting a security interest in that same collateral

3. Unsecured creditor one without security (collateral)

1. Judgment creditor – is an unsecured creditor who has won court judgment

a. A judgment is the court’s determination that the debt is due. It is the authorization needed for enforcement of the debt.

1. Judicial lien creditor – judgment creditor becomes judicial lien creditor after perfection of the judgment. (a.k.a. lien creditor)

1. Judicial lien is just as valid and as helpful as a voluntarily created security interest, but takes much longer to create.

b. Execution

1. Attachment – writ of execution or attachment obtained by show clerk your court judgment.

1. Directs sheriff to look for, seize and sell non-exempt property

2. Levy – seizure of property

1. Perfection – occurs once sheriff has levied upon (seized) the property, a lien attaches by operation of law

c. Garnishment

1. Writ of garnishment – attach debts owed to D for the benefit of debtors judgment creditor

1. Ask garnishee if it owes any money to D or have any property of D?

2. Command garnishee to withhold payment or return of property

2. Amount of wage garnishment is limited by law – 15 USC 1671

Judicial prejudgment remedies

1. Attachment

2. Prejudgment garnishment

3. Receivership – preserve or protect property pending final litigation.

4. Injunction

Types of Liens

1. Consensual lien

2. Statutory lien

1. Mechanic’s lien

2. Landlord lien

3. Construction lien

3. Judicial lien

1. Judgment lien – creditor records the judgment in a clerk docket (county deeds registry

a. Judgment creates a lien on all D real property w/in county of docketing

b. Can be extended to property in other counties by filing the judgment there

c. Lien subject to any preexisting third party interest recorded in the property

1. Prior recorded mortgages and liens

d. Lien may be junior to an earlier, unrecorded interest in property granted by D to a good faith transferee for value

1. Why? b/c judgment lienholder is not a consensual lienholder who has relied on real estate records in extending credit to D, so equities dictate that rights of prior unrecorded interest holder s/b protected.

e. Judgment lien doesn’t take precedence over any exemption to which D is entitle

f. Lien attaches to real property held by D at the time of recording and any after acquired property in that county

g. Lien encompasses any improvements on D property and any increases in value

h. Duration – dictated by state law.

4. Equitable lien

State law insolvency proceedings

Processes available to a D under state law for restructuring and compromise of debts

1. Composition and extension

1. Composition is a contract between D and two or more creditors under which a partial payment of claims is promised and accepted in full settlement

2. Extension is a contract between D and two or more creditors under which D is allowed an extension of time w/in which to pay the debt

2. Assignment for the benefit of creditors (ABC) is a voluntary transfer of property in trust by D to another person (assignee) w/ instructions to liquidate the property and to distribute its proceeds to those creditors who have elected to participate. (not contractual)

1. Advantages

a. Individual creditors cannot levy upon the property

b. Permits orderly liquidation and distribution for benefit of all creditors

2. Disadvantages

a. Cannot discharge unpaid debt

b. If creditors derive no advantage from it, it merely is fraudulent conveyance and avoidable.

c. Doesn’t stay collection effort by other creditors

d. If has effect of frustrating/obstructing creditors it may be inval