BANKRUPTCY OUTLINE
I. Nonjudicial Collection Methods
A. Basic Terminology
1. Voluntary Creditor: When someone voluntarily lends money or goods to a debtor and expects repayment.
2. Involuntary Creditor: When the creditor did not expect to be owed money, b/c they became a tort claimant or something. They are owed money, but didn’t want to lend out that money.
3. Assets: Things of value that a person owns. Includes physical things like homes and cars, but also bank accounts, stock ownership, IRAs, accounts receivable (when someone owes you money), life insurance, judgments and potential judgments (potential value), etc.
a. Business assets: Inventory, property, equipment, IP (patents, copyrights, etc.), good will, paintings in hallways, even something in possession of someone else like company cars.
4. Liabilities/Debts: Things or money that a person owes to someone else. Formal loans, credit card debt, etc. but also guarantees on loans, taxes, utilities, etc.
a. Business liabilities: Employee wages/payroll, loans, judgments owed, lawsuits (even if not yet filed, but potential/contingent lawsuits), guarantees, pensions owed, taxes, utilities.
b. Unsecured Debt: No collateral or property interest that is designated to pay the debt ahead of time in the case of default.
c. Secured Debt: The lender has an interest in some property of the debtor as collateral so that in case of default, that creditor is secured up to the value of that property. This is a lien.
B. Leverage: The actual power of a party regardless of legal rights (and including their legal rights) to enforce or get out of a debt. A creditor wants to increase its leverage to increase the likelihood that the debtor will pay his debts (hopefully voluntarily), and sometimes try to not force the debtor into bankruptcy, where the creditor will likely get only a fraction (if anything) of what they are owed. This means that bankruptcy puts an inherent limit on leverage. Leverage increases each party’s ability to bargain, especially if not in the formal debt-collection process.
1. Collateral: By having the loan secured by some property, the creditor ensures his repayment for at least the value of the property. Creditors choose to secure by collateral for 3 main reasons: it gives them leverage; it prevents the debtor from getting another loan by another institution in some instances; and it reduces loss in the case of default.
a. PMSI: Purchase money security interests, where the lender takes an automatic securitization in the asset they just sold you and can take it back (repossess) if in default. This gets special treatment sometimes in the Bankruptcy Code.
2. Non-Legal Leverage: Exists in the form of debtors wishing to repay for more personal reasons, like wanting to maintain a good relationship w/ the creditor, especially if the creditor is a family friend, doctor, etc. Ex is health insurance, b/c the debtor will probably want to stay covered.
a. Avoiding litigation: This is important to some creditors because it can be cost-prohibitive to litigate some debts. Lots of debtors are judgment proof and the time and money spent in litigation can be wasted.
b. Creditor Strategy: Sometimes they don’t want to get a judicial attachment or accelerate the debt b/c it might push the debtor into bankruptcy, so instead can try to enter a workout negotiation, to extend payback time or lower monthly payments etc. but it is probably better to also ask for a lien on something to have better leverage and security.
3. Indirect Leverage in Legal System: Some states provide rights of creditors that doesn’t require a lawsuit.
a. Employee Rights: In CA, a TRO can be issued to close down a company that twice in 10 years either violates the duties to pay employees (including agent, contractors, and subscontractors) or fails to satisfy an employee’s judgment for nonpayment of wages. Therefore, the employee has much leverage by making a credible threat to close the business if not paid immediately.
b. Child Support/Alimony: The threat of jail, w/o the ex-spouse having to file a lawsuit gives that spouse who is owed money leverage.
C. Credit Information Process: Credit reporting is a tool for creditors to decide which applicants to approve or deny. This increases leverage of creditor industry b/c debtors know that nonpayment can affect their credit, and can affect their lending opportunities from other creditors in the future.
1. Credit Reporting Services: Privately owned companies supported by creditors who use the service, and pay a fee to be part of it. They give the service information on debtors, and the service maintains info on each one. Some also keep personal info like change of address, if collection lawsuits are pending, and if filed for bankruptcy.
a. Rating Debtors: Many make credit scores w/ numerical values called a FICO score.
2. Federal Regulation: The Fair Credit Reporting Act gives the debtor access to the credit report info and prescribes procedures to assure the accuracy of the info in the file. Creditors have leverage b/c of these agencies but this act offsets some of it. Not only are the reporting creditors liable, but under this act so are the credit reporting agencies. 48% of credit reports sampled had inaccurate information.
a. § 611: Procedure in case of disputed accuracy: If a debtor disputes the accuracy or completeness, the agency must w/in a reasonable period of time reinvestigate and record the current status unless reasonable grounds to believe that the dispute is frivolous or irrelevant.
-If the investigation shows that the info is inaccurate or can no longer be verified, then the agency shall promptly delete the info. It is not reasonable grounds just b/c there is contradictory info in the consumer’s file that the dispute is frivolous or irrelevant.
-If the reinvestigation doesn’t resolve the dispute, the consumer can file a brief statement for their file (countervailing statement). The agency can limit it to 100 words. The agency must clearly note that the info is disputed and provide the consumer’s statement.
-If the info is deleted, the consumer can make the agency furnish notification to any person designated by the consumer who has w/in 2 years received a consumer report for employment purposes, or w/in 6 months prior received a consumer report for any other purposes which contained the disputed (and now deleted) info.
b. § 615: Requirements of users of consumer reports: If a person takes adverse action w/ respect to a consumer based in whole or part on info from a consumer report, they must provide notice to the consumer, provide the consumer the name, address, and phone of the agency that gave the report, and provide the consumer w/ a statement that the agency did not make the decision to take adverse action and is unable to provide the consumer specific reasons why the action was taken.
-Must provide notice to the consumer of their right to obtain a free copy of consumer report from the agency, and their right to dispute the accuracy or completeness under § 611.
-No person can be liable for a violation if he shows by a preponderance that at the time of the alleged violation he maintained reasonable procedures to assure compliance w/ this act.
-Duties of users making written or insurance solicitations on the info in a consumer file must include w/ the written solicitation:
*Info contained in the consumer’s consumer report was used in connection w/ the transaction;
*Consumer received offer of credit b/c they satisfied the criteria for credit worthiness;
*If applicable, that the credit may not be extended if after the consumer responds, the consumer does not meet the criteria or did not furnish necessary collateral;
*Consumer has a right to prohibit info contained in the consumer’s file from beings used in a transaction not initiated by the consumer;
*Consumer may exercise this right by notifying a notification system.
-Person who makes an offer of credit must maintain on file the criteria to select the consumer to receive the offer, all criteria bearing on credit worthiness, basis for distinguishing, and any requirements of collateral, until the 3 years after the date on which the offer is made.
-Fed agencies regarding unfair or deceptive acts or practices are not affected or usurped by this Act.
-Prohibition on sale or transfer of debt caused by identity theft
-Persons acting as debt collectors who are notified that the debt may have been the cause of fraud or identity theft, must notify the 3rd party that the info may be fraudulent and the result of identity theft, and upon request of the consumer, must provide the consumer w/ info as if the consumer were not a victim of identity theft.
c. § 616: Civil liability for willful noncompliance: If an agency willfully fails to comply w/ any requirement, it is liable to that consumer in the amount of the sum of:
-any actual damages;
-punitive damages as the court will allow;
-and in the case of an y successful action to enforce any liability under this section, costs of the action and reasonable attny’s fees.
-Usually reasonable investigation by the agency after notification by the consumer will make it so that it is not “willful.”
d. § 617: Civil liability for negligent noncompliance: If an agency is negligent in compliance, then liable to consumer in amount of any actual damages, plus costs and reasonable attny’s fees.
D. Restrictions on Nonjudicial Collection
1. Usury Laws: Largely state law. SC in 1978 said that the state law of the customer’s location was not relevant, and a bank could charge interest rates that were legal in the bank’s home state. This led to deregulation, and banks were attracted to these states who had repealed their interest rate ceilings. It depends on the state, but where there is a maximum, usually the creditor can still obtain the principal, just not the invalid interest.
a. Pay-day Lenders: A customer can go in and write a check to the lender, and the lender will hold the check until some specified date before depositing it and make a loan based on that check. There are implicit interest rates here b/c they will give you money, but you must sign over a large portion of your check when you get paid. They must be careful of running afoul of the state’s usury laws. Most are smart however, and are backed by
lect or attempt to collect any debt.
f. § 808: Unfair practices: Debt collectors may not use unfair or unconscionable means to collect any debt. The following is a violation: collection of any amount including interest, fee, charge, or incidental expense, unless it is expressly authorized by the agreement creating the debt or permitted by law; acceptance of a check or other payment instrument postdated by more than 5 days unless such person is notified in writing of their intent to deposit such check nor more than 10 days nor less than 3 business days prior to such deposit; solicitation of a postdated check for the purpose of threatening or instituting criminal prosecution; causing charges to be made for communications by concealment of true purpose of the communication, including collect calling; taking or threatening nonjudicial action for dispossession or disablement of property if no present right to possession as collateral, no present intention to take or possess, or property is exempt by law; communicating w/ consumer by postcard, or using language symbol on envelope. Can only use business name if such name does not indicate that it is a debt collection business.
-Bounced Checks: Trying to get a fee for this is collecting a debt b/c it is a voluntary creditor/debtor relationship b/c the check is not the same as just giving money b/c contingent on it being approved. Therefore, if a 3rd party tries to get the fee from you, under FDCPA, and can’t charge the fee unless it was part of the agreement creating the original debt. It is not clear whether a sign on the cash register stating that a fee might be charged will count, or getting a receipt with that info printed on the back. Also the fee cannot be usurious.
3. State Debt Collection Limitations: Most states have their own version of the FDCPA, which is similar to the federal. CA doesn’t limit it to “debt collectors” so it covers anyone collecting a debt.
II. State Law Debt Collection
A. General: Very individualistic, creditor-by-creditor, and is a race of diligence. It is based on old English common law. There is always the threat of the debtor filing a federal bankruptcy, which trumps these state proceedings.
1. Fed System Compared: Fed is more of a collective process, equalizing the distribution.
2. Liens: Interest in a debtor’s property as a security interest by a creditor. Can be affixed at the time of the debt, or made after the creditor gets a judgment.
a. 3 Benefits of a Lien
-Right upon default to grab the collateral and sell it to pay off the debt, usually w/o a lot of court involvement. Must be done w/o breach of peace and is either called repossession when personal property, or foreclosure when real property.
-Gives the creditor a superior claim in that collateral. No need to worry about judgment process and levy etc.
-Much better treatment in bankruptcy process.
b. Kinds of Liens
-Judicial Lien: Usually after a judgment on any claim for money, and have the ability under state collection system to get a lien.
-Statutory Lien: Under some state/fed statutes, a lien created for certain kinds of people as a privilege. Landlords have one (originally by common law) on stuff in the apartment for back rent. This can arise by special interest groups who lobby, like liquor wholesalers on liquor licenses, and contractors who can get a lien on a house when doing work there.
-Right of Set-off: In bankruptcy, where the bank has the ability to take what they’re owed on a loan from any checking/savings accounts that the debtor has with them. This is normally statutory. Key lenders to a business will usually require that the business shave their bank accounts there so that they can use the set-off.
*This isn’t as good as a lien in property b/c the debtor can just withdraw their money before filing for bankruptcy, before the creditor can take their set-off.
-Consensual Lien: An agreement by K btwn creditor and lender. This is usually the strongest kind b/c granted consensually so no question about whether it exists.
*For state law purposes, this is already perfected, so they have the first claim on the property.
