BANKRUPCTY: INDIVIDUAL DEBT COLLECTION
1) Dominant Themes/Central Ideas
a) Debtor’s fresh start
b) Long walk around a big circle: 2005 Amendments seek to curb judicial discretion but frequently relent in the final subsection…
c) Equality among creditors in Bankruptcy –pro rata distribution of assets
d) Good faith
e) Bankruptcy is a zero sum affair
f) Can’t get blood from a stone
g) Most bankruptcies occur as a result of unemployment or medical emergency
h) Due process demands keep debtors property out of reach until the court is finished, debtors are often tempted to use this time to unfairly reduce, dump, or hide their assets
i) Exemption v. Seizure tension: Satisfying debts vs. Punitive action
j) Tip: Stack the estate such that non-dischargeable debts get as much as possible
i) Eg, Taxes, Primary Mortgage (but don’t be a hog)
k) Bankruptcy is a privilege, not a right
1) Non-Judicial Collection Methods
a) Harassment. ACB: See Fair Debt Collection Practices Act
b) Limits this. No unreasonable hour phone calls; no humiliation in workplace…
c) Hire professional debt collector
d) Small Claims court
e) Hire Tony Soprano types (illegal debts are still enforceable!)
2) State Law Debt Collection –the race of diligence
a) Collection Remedies
i) Introduction to Judgment Collection
(1) Execution:
(a) Once π wins judgment she becomes a “Judgment Creditor”
(i) Judgment is only a means toward payment, it is not payment in and of itself
(b) Judgment creditor is unsecured
(c) Judgment creditor goes to sheriff to get a “Writ of Execution”
(d) Sheriff must receive a list of D’s assets
(e) The sheriff will then levy the specific assets (physical seizure or posting a sign) –no general levies allowed
(i) NOTE: The creditor has no interest in the debtor’s property until the point of levy.
(f) Once property is levied, π becomes a “Lien Creditor.”
(i) Priority of C is determined by date of filing the “Writ of Execution” w/the sheriff under the “Relation Back” statute
(ii) Judgment Liens can only be awarded by the state
(g) Sheriff then sells the goods and C gets the proceeds, D gets remainder, or
(h) C can seek a “Writ of Garnishment,” where a third party steps in and receives payment on a debt from someone who owes the debtor money
(i) Three parties:
1. Garnishee: the party who is holding the asset
a. Employer, bank, company shares
2. Debtor
3. Creditor
(i) HOWEVER: If between the time of seizure but before sale, D files for Bankruptcy, TIB can un-do the seizure or garnishment
(2) Turnover Orders:
(a) Used when D’s property is scattered in different jurisdictions
(b) Judgment D may be ordered to turn over property he possesses
(c) Including property that isn’t his, but that he has control over
(d) Will be held in contempt if disobeys
(e) Once collateral is traced to the D, D bears burden to prove it is no longer his
(3) Other Writs:
(a) Used for specific property or specific claims
(b) State by state basis
(c) Eg: “Sequestration” allows for the seizure of D’s property in which a creditor has a security interest
(4) Judgment Liens by Recordation:
(a) Judgment Lien against real property is obtained by recording the lien on county land records
(i) Rare counties allow liens on personal property too
(b) Can also apply to land D acquires after the judgment is recorded
(c) C does not have to locate or identify land
(d) By recording lien, C secures place in line
(e) Often the fastest and cheapest post-judgment collection step a C can take
(f) Risks expiration of the judgment if not acted upon in time
(5) Debt Collection by the Federal Government:
(a) Governed by the Federal Debt Collection Procedures Act
(b) Special rules to assure uniformity of collection for judgments owed to federal government
(6) Family Debts:
(a) Bankrupt men and women are more likely to be divorced
(b) Non-payment of alimony and child support are leading causes of bankruptcy
(c) Can imprison someone for unpaid family debt
(d) Rare instances that allow for garnishment future wages (typically exempt)
(e) The government takes these payments very seriously
(7) Voluntary Liens: ie: a Secured Interest
(a) First in time, first in right
(b) D and C agree in advance
(c) C then has an enforceable lien without involving the sheriff
(d) Consensual liens on real property = mortgages
(e) Consensual liens on personal property = security interest
(f) Most consensual liens require:
(i) A writing (security agreement)
(ii) Public notice (UCC Filing, or seizure of the prop, or by a specialized notice system, eg: lien on a car must be entered on its title)
(iii)Then the security interest is perfected
(g) Includes PMSIs
(i) PMSI: liens that are granted to a lender in the property that the loan is used to buy.
1. These get special protections under state law. They promote commerce and so PMSI holders are given a 20 day grace period to perfect their interest.
(h) Can also secure future assets
(i) C then gets collateral through foreclosure proceedings – w/out help of sheriff
(j) Also does not have to sell collateral – can instead keep it
(k) Security interest in BR: If security interest is perfected shortly before Bankruptcy, TIB can un-do the perfection
(8) Statutory Liens and Trust Funds:
(a) Artisan’s Lien: Car mechanic can keep your car until you pay the bill
(b) Landlord’s Lien: Landlord can keep your stuff until you pay rent
(c) Trust Fund Statutes: Make the D a trustee of certain property for favored Creditors
(d) Charging liens: For professional services…like a lawyer
(9) Exempt Property:
(a) Varies state by state
(b) Typically includes at least some portion of the value of the family home and household goods
(i) Aids in the debtor’s fresh start
(c) Usually litigate over how to classify
(10) Collection in Other Jurisdictions:
(a) Very difficult often leads creditors to seek an involuntary bankruptcy
ii) The Struggle Among Creditor’s Priorities
(1) Background:
(a) Debtors are usually in trouble with more than one creditor
(b) Three types of creditors:
(i) Secured
(ii) Unsecured
(iii)Tax creditor
(c) Depends on who made the first legal move – not in who loaned the money first
(i) Priority: First in time, first in line. “A race of diligence.” No sharing.
1. NY Rule: Where two creditors are of equal priority, the taxing authority takes priority.
(ii) Perfection: the state of grace a creditor reaches when its interest in the debtor’s property will prevail over subsequent interests
(2) Competing Unsecured Creditors:
(a) Race to obtain the specific levy ahead of other creditors
(i) Recall: PMSIs get special protections under state law. They promote com
that the gift was made honestly –(Twyne)
(b) Constructive Fraud §4(b) (intent does not matter, reasonable equivalent value, REV, makes this harder to prove):
(i) Fraud is construed as a matter of law rather than as evidence of a guilty mind.
(ii) The transfer is void if:
1. The Debtor did not receive reasonably equivalent value, and
2. Debtor is insolvent when transfer was made
3. Note: ‘reasonably equivalent value’ ≠ ‘fair mkt value’ -takes into account circumstances of foreclosure sales/debtor auctions, for example, where prices paid are typically below mkt value
(iii)Why you need both elements:
1. If Debtor has enough money to pay his creditors, he should be allowed to give things away
2. If Debtor is insolvent but sells something for value, then the money has replaced the property – nothing is lost to creditors
(c) Most will argue both actual and presumptive fraud –Why Not?
(d) Constructive Fraud Divides Creditors into Future and Past (future and present creditors can always assert claims for actual fraud)
(i) Present Creditor: Claim arose before the transfer occurred
(ii) Future Creditor: Claim arose after the alleged fraudulent transfer
(iii)Future Creditor’s rights are limited:
1. Future creditors should check out who they loan to more carefully
2. If actual intent – can bring claim at any time
3. For Constructive Fraud:
a. §4(a)(2)(i): The debtor was involved in or was about to engage in a business venture, and the transfer left the debtor with insufficient capital for the project, or
b. §4(a)(2)(ii): The debtor intended to incur, or reasonably should have believed that she would incur, debts beyond her ability to pay as they became due
c. §5(a): The debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer
i. Looks at today. Only available to present creditors, not future creditors.
d. §5(b): If the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.
i. Only present creditors. Note the extra layer examining the state of mind of the insider.
e. § 5(a) looks at today
f. § 4(a)(1) and (2) are forward looking
g. ACB in closing: Present creditors may bring claims under two sections and future creditors only get to bring something under §4.a. The reason for this is because we expect future creditors to take better care!
i. Keep in mind that the debtor can fraudulently transfer all sorts of things so long as the debtor is still solvent. We don’t care as long as he pays
h. NOTE: §548 reaches back 10 years for fraudulent transfers, state law often extends back further
