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Bankruptcy
Temple University School of Law
Woodward, William J.

Bankruptcy

Professor William Woodward

Ø Introduction

o Keep in mind when we are dealing with state debt collection practices, presence of bankruptcy always lurks

o Creditor first in line to levy on a property under state law may find his situation dramatically altered when the debtor enters into bankruptcy prior to the disposition of the property.

Ø Collection Without Courts

o Non-Judicial Collections and Restrictions

§ Big-picture—this comprises small portion of total debt collection.

· Empirical shows that very few bankruptcy filers had judicial action initiated against them

§ Leveraging – usually credible threats of harm to the other party.

· Leveraging is all about hitting the debtor where it hurts.

· Exert leverage over the so wants to pay, more likely to get paid without judicial enforcement.

· The debtor’s decision making

o Personal Priority

§ They will have debts

· Making either conscious or unconscious decisions to either:

o Pay one bill

o Not pay another

o Pay only a portion of one

§ Do they need future service

· Might want to pay a doctor to get future care

§ Can other party prosecute the debtor?

· The creditor’s decision making

o Is it worth it to collect judicially?

§ Small debt won’t be worthwhile when considering:

· Court fees

· Legal fees

· Time

§ Perception that litigation is fraught with unnecessary costs.

§ Other litigation dangers in consumer collection

· Judgment proof

· Deemed not to owe a debt

§ Might be better to seek voluntary payment – no risk of bankr sprung

o Determine how (at the lowest enforcement cost) make more likely that debtor will pay

§ Make it less costly to the debtor or more beneficial to them to make payment

o Direct method

§ Mortuary example: dumping the body on their steps

o Other methods

§ Harassment

· Phone calls

· Letters

§ Embarrassment (think about the type of creditor to determine effectiveness)

· Posting cancelled checks

§ Economic

· File with credit bureaus, effecting credit

o Security

§ Leverage

· When the debtor has security, they have the ultimate leverage

o If business tools you have leverage over what they need to stay in business

§ Practice typically used in term loans made to businesses which require the pledging of all items associated with the business.

§ Note: you can get this at any time. Go for jugular with critical equip.

§ Collateral Control

· A perfected security interest will generally prevent the debtor from obtaining an additional loan on the same property.

§ Loss reduction

· You can foreclose on the security interest and recover loss from a default through the sale of the property

§ Ability to Collect

· Woodward said something about larceny if you just go and take it.

· But art 9 security interest give you a contractual right to repo, no BOP

· NOTE: Debtor’s strongest counter-leverage – esp unsecured is bankruptcy

§ Indirect Leverage in the Legal System

· State laws shift leverage

o Ex. CA law saying that if a Co. violates duty to pay employees under the act or engages in some other statutory misconduct then a TRO can be issued to shut down the co.. Pg-7

§ If employee knows about this, they can exact significant leverage to get paid.

· Credible threat to shut things down if not paid

o Cf. situation under FDCPA, where a lawyer tries improperly to collect on behalf of client

o Child support

§ Jail for nonpayment

o Bank

§ Report to IRS as forgiveness of debt.

§ Credit Information Process

· Credit Score

o This can have an important effect on the collection process

§ typically inform creditors who to extend credit to and varies applicable rates

§ Debtors don’t want their score damaged

o FICO score (“Fair Isaac Company”) made this famous.

o Warning Letters

§ “Protect you credit rating”

o This can provide particularly powerful incentive for wealth concerned of reputation

· Deny future credit

o Stronger if nowhere else for debtor to go

o Can creditor influence other providers

· Fair Credit Reporting Act (15 USC §1681) – pg 10

o Themes

§ Giving debtor access to credit report information

§ Prescribing features to ensure accuracy

o Reinvestigation

§ If the consumer contests an item must conduct a free invest. to make sure accur.

§ Prompt changes

o Notification of adverse action based on the report

§ Must let you know why they are acting and the report that served as the basis

o Willful noncompliance can result in civil liability

o FTC enforces

· Frequent Complaints by Debtors

o Debts listed weren’t owed

o Amounts incorrect

o Payments registered not accurate

· Reporting agency can’t defend itself by saying creditor gave it bad info

o Both codefendants

· Credit Reports highly important now

o Used by employers, car insurance, life insurance, health insurance

· Still there is high degree of error in credit reports

o Empirical 79% contained error

o Restrictions on Non-Judicial Collections

§ Usury Laws

· Made certain high intr. rates or rates of return usurious, rendering them uncollectable or criminal

· Governed by state law

· SCOTUS

o Marquette National Bank of Minneapolis v. First Omaha (1978)

§ LOCATION LOCATION LOCATION

· Held that state law of customer’s location was irrelevant

· All that mattered was legal interest rate in bank’s home state

o Prompts race to bottom

§ Delaware and other deregulate interest

o National Bank – prb located in place that you’re ok

§ Fair Debt Collection Practices Act (FDCPA)

· Purpose

o Remedy abuses in the collection industry

· Terms

o The term “debt collector” means any person . . . who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.

§ Also applies if they use another name

§ Does not apply if actual creditor is collecting

· Officer or employee of creditor collecting in the name of

§ Pretty much we don’t want third party debt collectors

· Theory – creditors not as prone to bad conduct cause more concerned with reputation so won’t act so badly because marke

§ Loss and damage, and

§ Failure to repay loan

o Making a false representation about any portion of the debt

§ Reason for holding

· Plain language. Earlier version had exemption for lawyers

· No real line between debt collection and litigation

§ Also held

· Can’t stop ordinary lawsuit communications

· Brown v. Card Service Center

o Facts

§ Debt collector (card services was a debt collection firm) sent letter to debtor on behalf of creditor

§ Language

· Unless she paid in 5 days

o “Could be” referred to lawyer

o “Could” result in “a legal suit being filed”

§ They didn’t do what they said they were going to do

o Below

§ Court said “could” was too conditional

§ Drew could v. would distinction

o Holding

§ All comn’ctns w/debtors must be viewed from perspective of least soph. debtor

· Remedial statute so the court construed broadly

· This lowers std to whether the communication would deceive or mislead not a reasonable debtor but an unsophisticated one

§ FDCPA prohibits false representation involving lawsuits.

· letter potent’ly violated if firm had no intent to take threatened action.

§ Held:stmnts in letter could be deceptive or misleading if didn’t intend to sue

o Factors

§ Can p’tiff prove similar claims were seldom litigated or seldom referred to attny

o What are Typical Business/Consumer Debts of a Debtor:

§ Mortgage

§ Ongoing expenses (this reflects a need to know about cash flow): Utilities and Rent

§ Tax liability

§ Salary to employees (payroll and benefits (vacation) owed)

§ Any pending judgments

§ Dividends/Accounts payable

§ Regular Loans

§ Potential liability – potential torts or future liabilities.

o Potential Assets (Consumer)

§ Collectibles

§ Accounts Receivable (Loaned money)

§ Tax return

§ Business assets (Inventory) Employee Fringe benefit owed

§ Unpaid Salary (not yet received)

§ Retirement Accounts (IRA/401k), Pensions; Bank Accounts

§ Judgments

§ IP rights

§ Stocks and Bonds

§ Alimony/Child Support Owed (both)

o Lawyer Opinion Letters

§ Opinions are usually hedge pretty significantly because they don’t want to get nailed

§ Function of this in transactional work is to make transaction more solid for purchasing party (give some assurances)

· Described as an interesting and “perverse” activity

· Lipson asserted that these are worthless, lawyers spinning their wheels because they are so hedged.