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Villanova University School of Law
Taggart, Walter John

Bankruptcy – Spring 2012

Prof. Taggart

Chapter 1: Introduction to Debt Collection and Bankruptcy

A. Collection Outside of Bankruptcy

I. Non-Judicial Collection

a. Secured vs. Unsecured Creditors

i. Two Types of Creditors

1. Secured creditor has security for debt (“collateral”)

2. Unsecured creditor does not have security for debt

a. Collateral – can be personal property subject to “security interest” (Art. 9); or real property subject to a “mortgage” (state mortgage law)

ii. Secured → is a creditor that in exchange for lending money to a debtor has received some type of pledge (i.e. collateral) to secure repayment. The personal obligation of the debtor to pay the debt is reinforced by a right in rem acquired by the creditor in certain property of the debtor.

1. Most commonly, the debt is satisfied by the sale of property to satisfy the debt or by the creditor taking the property and keep it in full settlement of the debt.

a. Ownership interest in the property remains with the debtor, encumbered by the creditor’s interest.

2. Secured creditors can sometimes be secured and unsecured. How? If you are a secured creditor and the security interest you have is less than the total amount the debtor owes you, you have both a secured and unsecured claim. A secured creditor is a secured creditor only to the amount of the debt or to the amount of the collateral, whichever is lower.

3. If the creditor holds a lien on property in which the estate has an interest or if the creditor has a right of setoff against the debtor.

a. Lien should be RECORDED in the recorder of deeds office.

b. Title search at Records office should reveal the lien.

c. Lien gives the creditor priority over unsecured creditor w/r/t the amount owed to the creditor up to the amount of the lien.

4. Secured creditors can “foreclose” if debtor defaults by bringing a judicial action to foreclose on the collateral

a. Sometimes called “replevin” or “claim and delivery”

b. Creditor seeks judgment for amount allegedly due, an order to compel debtor to turn over the collateral to sheriff, and an order to have the collateral sold & turned over.

c. Sometimes the debtor will hide the collateral once they are sued by creditor [especially true for a car/something moveable] so creditor needs remedy prior to judgment so that he can secure the collateral

5. UCC § 9-609(a)(1): Secured party may repossess w/out judicial process so long as they proceed without breach of the peace (2 factors):

a. Whether creditor entered debtor’s premises (if so, likelihood of breach goes up substantially);

b. Whether debtor, or someone acting on behalf of debtor, either consented or objected

i. Consented to entry and repossession = no breach

ii. Contemporaneous consent required (i.e. not just purported “consent” in original loan documents) – bc policy concern is to avoid immediate violence

1. Deciet or trickery in procuring consent likely negates consent

2. Objected to entry and repossession = breach

c. Creditor could be liable for conversion if debtor’s personal effects are taken

d. Situations where breach of peace will likely be found = repossession took place in restricted area (e.g. debtor’s home, closed garage, behind locked fence, etc).

e. Situations where breach will NOT likely be found = repossession is from an open area (e.g. street, driveway, open garage, parking lot) and no objection is raised

f. Liability for breach of peace in repossessing: Tort liability, Criminal penalties, Statutory liability under UCC § 9-625, a possible loss of deficiency judgment.

6. Secured Priorities

a. General Priority Rule: First person to get a Security interest has priority over anyone else. First to file rule.

i. Exceptions: PMSI gets priority.

1. If 3 perfected liens of $500 on a $900 collateral…

a. Lien 1 – Recorded 1.1.11

b. Lien 2 – Recorded 2.1.11

c. Lien 3 – Recorded 3.1.11

2. Foreclosure Outcome:

a. Lien 1 – Collects full $500

b. Lien 2 – Collects $400, $100 general unsecured claim.

c. Lien 3 — $500 general unsecured claim.

b. Outside Bankruptcy Priority Order:

i. Perfected property interests: judicial liens, mortgage, security interests.

ii. Unperfected security interests

iii. General unsecured creditors.

iv. Last tier – Shareholders, equity, debtor.

c. Inside Bankruptcy Priority Order:

i. Perfected property interests: judicial liens, mortgage, security interests.

ii. Administrative expenses (attorney/trustee fees) get paid after the perfected secured creditors.

1. Administrative Expense Priority:

2. Ex: C works as a P/T guard for D. D owes $100 to C at the time of filing. C continues to work after the filing, but that $100 is not an administrative expense.

iii. General unsecured creditors

iv. Shareholders, equity, debtor.

iii. Unsecured — is a creditor that has received no security for his debts other than the credit worthiness of the creditor they lent money to.

1. Ex. Credit Cards.

2. FDCPA of 2005 – You can’t go too far in collecting debts. For example, the creditor cannot hound an employer to get the employee to pay, otherwise the employer might threaten termination.

3. Because unsecured creditors do not have a pledge of property to secure their debt, they can’t walk up and take someone’s property. How do you collect debts as an unsecured creditor? . . .

a. File a complaint.

b. Preliminary objections.

c. Judgment in court.

d. Seize and convert the assets – Attach the property/assets to the judgment.

i. Attachment – The process of creating a lien and making it valid against the debtor.

ii. Attachment date – The dat

an error

iv. Remedies under FDCPA

1. Civil liability: actual + statutory damages + costs/attorneys fees

2. Administrative enforcement by FTC: injunctive relief or cease & desist

II. Judicial Collection – creditor invokes power of state to collect

a. Postjudment remedies: Enforcement of Money Judgments

i. Introduction

1. Priority dispute — arises when 2 or more non-debtors assert a claim against debtor’s scarce assets [“first in time, first in right” — first to obtain enforceable claim (lien) usually prevails in priority dispute]

2. Lien = enforceable claim against debtor’s assets

a. Creditor’s rights become fixed at time when it gets a lien against debtor’s property

b. Judicial lien – lien obtained through judicial process

c. Execution lien – obtained through execution of debtor’s nonexempt property

d. Consensual lien – lien obtained by agreement of creditor and debtor (usually at beginning of credit relationship)

i. Security interest – lien on personal property

ii. Mortgage/deed of trust – lien on real property

iii. Secured creditor can enforce consensual lien by foreclosure – sometimes without judicial process

iv. If “perfected” under state law (by recordation, public notice, or possession of collateral)

1. Normally enforced against debtor and third parties

2. Honored in bankruptcy

3. Unsecured creditors’ rights:

a. Have court determine debtor owes creditor money, by entry of judgment

b. Invoke power of state to seize nonexempt property to satisfy judgment

4. Characteristics of a money judgment

a. Executable – judgment gives creditor right to use legal process to seize debtor’s property and sell it in order to satisfy the judgment

b. Lienable – judgment creditor may use judicial process to obtain lien on property of debtor to secure payment of judgment debt (i.e. previously unsecured creditor can become a secured creditor)

c. Actionable – creditor may bring a civil action asserting the judgment itself as a basis for lawsuit

i. This may be important if the property creditor seeks to enforce its judgment is in other state – creditor must then bring new action in second state, and the new action will be based on the judgment entered in the first state, rather than on the original underlying debt