I. Introduction
a. Central theme of bankruptcy- debt collection v debt forgiveness
i. Why NOT to forgive:
1. We need commercial certainty and finality
a. No collections, no payroll, no food for the kids
2. moral responsibility to pay debts
3. the need for financial liquidity in commerce
a. If a major asset of a business is its accounts receivable these accounts to need to be collected so a business can borrow against the accounts as collateral
ii. Why TO forgive
1. Need for orderly resolution in the commercial context
2. moral responsibility of mercy/forgiveness
3. creditor irresponsibility – college kids that get credit cards and water bottles the first day of school
a. why should we protect irresponsible creditors
4. We need to encourage taking risks and starting businesses
a. So people are not liable for the rest of their natural life for taking a business risk
b. Motivations
i. Debts are paid based on debtors weighing the risks and rewards of paying one debt as opposed to another
1. which debts will cause the most problems if not paid
2. which payments will yield the greatest results
3. try to avoid helping a debtor when their motivations are to continue a failed business play beyond their ability
ii. Creditors – they weigh how much to invest in debt collection
1. should they sue?
2. should they throw good money after bad?
3. they must consider if their collection efforts will be perceived badly by the community and affect the good will of their business
4. sometimes they will want to enforce a lien on something that is of little resale value to them but a debtor will pay a lot to keep for subjective reasons
5. try to avoid pursuing cases when the motivations are illegitimate like to pursue a personal vendetta
6. Stream of cash is most important
iii. Every creditor is a debtor to someone else – this often causes a ripple effect
c. Reasons for taking collateral
i. Leverage- how much power or perceived power you have in a bargaining situation
1. greater incentive for borrower to make his payments
ii. collateral control – to keep the debtor from going to other lenders
iii. loss control/ reduction to sell on default
d. it is always a good idea to settle
i. court is always a gamble
ii. the debt could be declared invalid over a technicality
iii. with businesses
1. one owns the equipment and one is the operating company
2. having a claim against the operating company you cannot get to the equipment unless the debtor cooperates
iv. Many credit issues can be settled with corrections methods not including the law or lawyers
v. Many debts are paid voluntarily
e. Leverage
i. Some say this is determined at the time the credit is incurred
ii. the creditor is in control here and can basically ask for anything they want if you need the money badly enough—esp bc of freedom of contract
iii. Rules are meant to balance leverages –
1. Indirect leverage – (methods to shift leverage and encourage payment) The IRC is a correction device for regular creditors
a. The government can threaten to shut down a company if they do not pay wages a certain amount of times (this encourages them to pay their “debts” to employees)
b. Taxes generally cannot be discharged in bankruptcy. Taxes are for the public good
c. BUT very often banks will threaten debtors saying that if the debtor doesn’t pay that they will tell the IRS that the debt was forgiven and therefore that the debtor has to report the forgiven debt as income-
i. Now the law REQUIRES a creditor to report the debt forgiveness to the IRS
ii. In CH 7 and 11 discharged debt is NOT income
1. debts discharged in bankruptcy are NOT taxable
iii. The creditor can still collect from the debtor even after making them report it as income!
iv. These threats are often just for revenge but this can backfire because then the debtor is less willing to try to pay
d. lots of laws to protect former spouses and minor children
2. There are different statutory wild cards – politics often determines priorities
a. The perishable agricultural commodities act—the supermarket holds certain money in trust for the farmer (so when a supermarket goes into bankruptcy… the farmers get paid first because they have a better lobby!)
i. The farmers cut out the bank liens
ii. All money the seller of perishable goods has is PRESUMED to come from the sale of those perishable goods and the merchant holds the money in trust until the merchant proves otherwise (which is virtually impossible
lement in exchange for dropping the charges
2. BUT you can get a restitution order for your debt and that debt is not dischargeable even if the debtor later files for bankruptcy
v. But an employee may jail his employer for not paying wages
1. the states have very often created laws allowing this and shifting the leverage to the employees
b. Usury laws – STATE LAW
i. Collection has often been limited even back to biblical times
ii. If you charge too much you can often lose the interest of even the principle
iii. Marquette National Bank – says that the laws of the state in which the bank’s main office is in controls the applicable law (if the bank is federally chartered)
1. Many banks establish themselves in Delaware—NO restriction on interest rates
2. Delaware has very few consumer protection laws and no usury laws (NJ protects consumer inflows much more)
c. Common law remedies *for the most part the courts have eviscerated these*
i. Normal tort and criminal laws apply
1. If collecting activities cause mental distress there may be a civil claim –
a. In NJ it must be VERY SERIOUS mental distress
i. No reasonable man could be expected to endure the distress
b. Some states require actual physical injury to sustain a cause of action
c. Public Finance v Davis
i. Two prong test
1. Where the conduct has been so outrageous in character and so extreme in degree as to go beyond all possible bounds of decency
2. the emotional distress must be severe
ii. Constitutional rights to privacy (Griswold) or against libel
1. rare to recover for these
2. its hard to limit collection because of free speech implications
d. Federal controls – FTC administers the regulations but is forbidden from promulgating their own rules or regulations
i. Enforced mostly by private actions
