BANKRUPTCY
Professor Giacinti
Spring 2007
Bankruptcy Code – 11 U.S.C. § X
The Commercial Code is what dictates how C obtains a security interest in personal property. Every state has a set of exemptions for what can/cannot serve as a security—i.e. homestead and automobile exemptions. The exemptions will only apply to involuntary encumbrances (judgments/liens/attachments). These exceptions do not apply to D voluntarily giving a security interest in his property.
The exemptions are meant to protect D from unsecured creditors. Some exemptions only cover up to a certain amount. If the value of the property exceeds the exemption then D must give it up, and D only gets the amount of the exemption in cash.
Suppose that D files bankruptcy—unsecured creditors of D have no access to D’s home. D can keep his home if he continues to pay the mortgage to his bank (i.e. the C with a security interest in the home.) D can continue to make payments because any money after bankruptcy belongs to D.
Unsecured Creditors (General Creditors): There are several nonjudicial remedies to collecting on debts. The creditor (if they are a business and the debtor is another business) can refuse to ship more products; they can threaten a lawsuit; they can sell their claim at a discount to a collection agency (the third party collection agency is confined in its collection remedies to whatever the original creditor could do to collect); or they can report the debtor to the credit bureau.
If this doesn’t work the creditor must resort to judicial measures. An unsecured creditor cannot reclaim the property that they gave to the debtor. Seizing the property is a self help remedy that is not available to unsecured creditors, only secured creditors.
The creditor will be concerned about their rights above other creditors. The best way to secure your right is to get your claim from the debtor. Another way to secure your right is to get a court judgment. A default judgment is just as good as one where the debtor showed up.
Judgments on Real Property and Fixtures: A judgment establishes a lien on the debtor’s real property and fixtures—this is called a judgment lien. A judgment lien doesn’t give the creditor immediate right to the property. It only encumbers the property in the creditor’s favor—it gives the creditor a right to go after the property and priority over everyone else who acquires later liens or acquires the property after the lien.
The next step is a state supervised sale. The sales are regulated to protect both senior and junior creditors—junior creditors have a priority on the property that’s behind senior creditors. Junior creditors only get paid if the property sells for more than what’s needed to pay the senior creditor in full. If there are no junior creditors on the property than the excess money is returned to the debtor.
Judgments on Personal Property: The creditor must use the judgment to obtain a writ of execution. This writ directs the sheriff to seize sufficient property of the debtor to pay the creditor’s judgment.
With individuals, state law often protects certain as
Bankruptcy Local Rules (every jurisdiction has these in order to implement the bankruptcy rules. It will determine things such as what C must plead to establish fraud. It is more specific than the Code.)
FRCP – The Federal Rules of Civil Procedure (remember that bankruptcy is always a federal matter. Do not look to state procedural rules.)
The Bankruptcy Code:
Chapter 1 – Definitions
§ 101(5) A Claim: A claim is a right to payment, it is a right to money. C’s right to money must arise before D files his bankruptcy petition. Remember—you must determine all claims. Not all claims are obvious—i.e. tort victims have claims within the meaning of § 101.
A right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmeasured, disputed, undisputed, legal, equitable, secured, or unsecured; or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
§ 101(10) A Creditor: Creditors have § 101(5) claims—they may also have post petition claims (i.e. administrative claims.)
