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Bankruptcy & Creditors' Rights
Wayne State University Law School
Bartell, Laura B.

BANKRUPTCY OUTLINE
 
*SEE CM PACKET*
I. Preliminaries
 
A. Debtors – obligor of a monetary obligation. Even without borrowing: accounts payable, payroll, warranty obligations, credit cards, taxes, damages to apartment.
B. Creditors – lend money. But also accounts receivable.
 
Default: failure to meet a legal obligation.
                – people may pay their debts to avoid repossession, embarrassment, credit rating.
 
II. Fair Credit Reporting Act (FCRA)
– 15 U.S.C. § 1681
* – see statutes, Handouts p. 1.
 
– if denial of loan based on credit report (in whole or part) must:
                                – provide notice that report was reason. If no notice and Debtor can show negligent non-compliance, he can get actual damages, if willful can also get punitive damages.
                                                – but hard to establish damages without notification. Can’t sue credit reporting company just because lender didn’t notify.
                – Debtor can notify credit reporting agencies of dispute. They must investigate within 30 days or 45 with information.
                                – if they find something wrong they must notify Debtor and creditor.
                 
– Fraudulent Creditors who furnish false info to credit reporters.
                – must show purposeful reporting of an error (knew, or consciously avoided knowing about error).
 
III. Fair Debt Collection Practices Act (FDCPA)
– Question to ask:
                – Is it a debt (not just late bill)?
                – Does collector meet requirements and not exclusions?
– 4 requirements to be a debt collector: [PAIR]                 – 1. Person.
                – 2. Instrumentality of Interstate commerce used (mail, phone, computer etc.).
                – 3. Regular:
                                                – a. Regularly collects debts, OR
                                                – b. Principal purpose of his business is to collect debts.
                – 4. Another: debts owed or due to another.
                                – not someone who collects for himself, unless you use an alias
 
**- see Handouts p. 3 for Exclusions.
 
Prohibited practices: [IN MUCH]                 – Investigation: communications to find Debtor’s residence, telephone, or employment info.
                – Notice: failure to send written notice or verify if disputed.
                – Misleading: false, deceptive or misleading representations.
                                – can’t threaten to take action they don’t mean to. Can’t threaten criminal proceedings.
                                – can’t lie about amount of debt to encourage settlement.
                – Unfair or unconscionable means.
                                – can’t accept post dated checks unless notice.
                – Communications: with debtor or third parties.
*- see Handouts p. 4.
 
– FDCPA applies to lawyers who regularly collect others debts (-Hines).
                – lawyer can write with letterhead (an implicit implication of suit), but cannot explicitly threaten one he doesn’t intend to take.
– even if the FDCPA doesn’t apply, creditors still subject to criminal and tort law.
                – Intentional infliction of emotional distress: going beyond all possible bounds of decency; so severe that no reasonable man can be expected to endure it (very high standards; more than FDCPA).
– most Debtors don’t know these rules.
 
Lender Liability:
– before cutting off new loans you must send notice within reasonable time. Cannot be for trivial reason (-KMC (34)).
– Consequences: lender doesn’t get paid AND is liable to debtor.
 
Secured v. Unsecured (EE 7)
– Security: right in rem acquired by the creditor in certain property of the debtor.
                – creditor usually has a charge against property (encumbrance), not title in it.
                – only on default is creditor entitled to take action.
                – Attachment: creating a valid lien against debtor.
                – Perfection: expansion of attachment so that lien is good against third parties.
                                – a perfected lien is good against subsequent transferee because debtor can only transfer what he has.
                – Foreclosure: method of collecting on secured property (Article 9).
                                – Seizure: obtaining possession, AND
                                                – may be allowed by self help; may be contested in court.
                                – a. Sale: sell property, apply proceeds to debt. Any deficiency still owed to creditor.
                                – b. Strict foreclosure: keep property and have no claim for deficiency against debtor.
                                – c. Self help (Foreclosure by Advertisement / Power of Sale).
 
                – Priority: generally: first in time [of perfection], first in right. Senior security owners get their full share before juniors.
– Ask:
                – 1. Is lien valid (properly perfected)?
                – 2. Effective date?
 
Non – Secured Creditors must sue and get a judgment.
– levy: legal act of asserting control over property, gives rise to execution lien.
                – Two ways to recover on judgment: [GE]                                 – A. Garnishments: affects third parties payment to debtor.
                                                – usually for wages, bank account.
                                                *- Garnishment only good for money at time of serving. Creditor must find garnishee.
                                                – Garnishee liable for all it holds for debtor at time of serving.
                                                                – may be liable for not following the garnishment.
                                                – Procedure: After Notice and filing, Serve writ of garnishment on third party within 91 days (or it expires), who pays the lender or the court. Debtor can protest.
                                                                – Limits: under federal protection act can only garnish 25% or amount 30x over minimum wage.
                                                                                – but Taxes and Child Support can be garnished without limit.               
                                – B. Execution: reaches physical assets of debtor.
                                                – Procedure: After 21 days clerk can issue a Writ of Execution. Sheriff seizes (“levies”) personal property.
                                                – Personal property must be seized and sold before real property.
                                                                – If non-exempt property Sheriff can sell it at auction that must occur between 20 and 90 days.
                                                                                – afterwards debtor has limited right of redemption.
                                                – Judgment Lien arises after Sheriff seizes property on execution (creating a judgment lien creditor).
                                                                – Relation Back: time of lien is time of delivery of Writ.
                                                                                – First Creditor to deliver Writ comes first.             
                                                                                – if these Writs expire or are insufficient, must apply for another.
 
Filing protects against other creditors taking priority.
                – but even without filing you still have a valid security interest.
 
Pre-judgment Garnishments –
                – can’t garnish wages, or money owing to city.
                                – can only garnish for a particular debt.
                – dissolved if Defendant appears.
                – Procedure: like Attachment. Court issues writ to garnishee.
 
Pre-judgment Attachment –
                – gives Defendant incentive to appear in court and submit to jurisdiction.
                                – attachment is dissolved once Defendant appears.
                – ensures assets won’t disappear.
                – Procedure: must bring court action. Must claim diligent efforts to serve defendant. Judge can issue writ to seize non-exempt assets, which are held until judgment.
 
– Exempt Property Under State Law
– State exemptions are applicable to all state collection activity and states can make them applicable under bankruptcy by § 522(b).
                – Classification: debtor tries to reclassify things to be exempt.
                – Valuation: if worth more than limit you can:
                                – A. Sell and keep maximum allowed, OR
                                – B. Pay amount over limit to creditors.
                *- IRS Limits (see chart).
                                – no motor vehicle exemption unless tool of trade.
                                – no exemption for health aids.
                *- Michigan Limits (see chart).
                                – even tougher than IRS.
                (- Texas Limits).
Married Couples:
                – Property held by Tenancy By Entirety (each own full).
                – creditor of one spouse cannot take away the property owned by TBE.
                                – but both spouses may be debtors.
                                – IRS can seize TBE even for one debtor spouse (-Clark).
 
Race
– if other creditor takes assents others won’t be able to collect on them.
– can negotiate with other creditors: buy out their interest, restructure collective debts (composition/extension agreement).
                – composition: contract with multiple creditors for partial payment of claims as a settlement of debts. Usually also contains an:
                                – extension: contract with multiple creditors for longer time to pay.
 
State Insolvency Proceeding (EE 61)
– collective proceeding, not individual creditor proceeding.
– 3 similar mechanisms to Bankruptcy in MI: [RAA]                 – A. Receivership: post-judgment remedy to collect. (Involuntary)
                                – court appoints receiver of property who collects, disposes, and satisfies judgment. Gets control over debtors assets.
                – B. Assignment: for the benefit of creditors. (Voluntary).
                                – debtor assigns all his non-exempt property to a trustee (assignee) who executes a performance bond.
                                                – prevents individuals from levying it, facilitates orderly liquidation and distribution.
                                                – Needs court approval to sell assets.
                                – creditors share in assets if their interest filed within 90 days.
                                – Differs from Chapter 7:
                                                – i. Stay: NO stay so creditors can also pursue other collection methods.
                                                                – creditors may be able to force involuntary bankruptcy under § 303(b)(2).
                                                – ii. Fraudulent: may be considered a fraudulent transfer if creditors receive no benefit.
                – C. Assignment of wages: (Voluntary)
                                – only available to wage earners who assign their wages to the court who distributes.
                                – debtor gets an exempt portion.
                                – creditors can garnish also.
 
Uniform Fraudulent Transfers Act (“UFTA”)(EE 75)
– an abuse of ownership rights: where debtor transferred property to another.
– unsecured creditors can avoid fraudulent transfers.
                – lien holders d

a single event that affects a large number of people.
                – injury usually caused later.
                – results in Class Action. There are limits: can’t include people who have not yet been harmed (-Fairchild). They technically have contingent claims but there are three different approaches to when this claim arises: see above.
                                – dangerous product liability cases may require specific informing of possible claimants to satisfy notice requirement.
                – Future claimants must be provided adequate representation. Courts appoint a Future Claims Representative see § 524(g).
                                – 3 parts: [RIT]                                                 – i. Representative: appoint a future claims representative.
                                                                – some say you just need representative, others say you need both notice and representation.
                                        – ii. Injunction (Channeling Injunctions): all future claims must be brought to a different forum: they can recover from a trust.
                                                – iii. Trust: created in plan, it assumes all liabilities, funded by company with stock and future earnings.
                                – some say this is not enough.
 
– Actors:
                – Creditors: anyone with a claim (broad definition).
                                 – a. Secured (§ 506(a)): Only secured up to the value of collateral (any excess become bifurcated). Over-secured creditors can collect matured interest up to the value of collateral.
                                                – Bankruptcy does not affect secured creditor’s rights (but it defines secured claims in § 506(a). So they do not technically need to file proof of claim.
                                                – Should perfect (record) their security interest or might have trouble proving security.
                                – b. Un-secured: unsecured creditors get matured interest only after full distribution (rare).
                                                – present value: not considered interest.
                – U.S. Trustee: responsible for bankruptcy system in an area.
                – TIB (Trustee In Bankruptcy): private citizen appointed by Trustee or elected by creditors. Collects, sells, and distributes property.
                                – needed for Chapter 7 and 11.
                                                – In Chapter 11, there can be a DIP (Debtor In Possession).
                – Debtor: seeking relief in bankruptcy.
                                – has basic obligation of good faith.
 
– “Person”: includes individual, corporation, but not governmental unit.
– “Individual”: a human.
 
– Types of Bankruptcy: 2 major types [CB]:
                – 1. Consumer. (The majority of Bankruptcies).
                                – can choose Chapters 7, 13 (or 11, but rare because of expense).
                                – bulk of debt from domestic consumption.
                – 2. Business.
                                – can choose Chapters 7 or 11.
                                                – corporations get no discharge under Chapter 7.
                                                – corporation get no exemptions.
 
Eligibility (§ 109)
– almost anyone who is a resident, domiciled, conducts business, or owns property in the U.S.
                – not serial filers for 180 after voluntary dismissal after relief from stay requested (-Richardson).
                – not those who have had cases dismissed from non-cooperative, disobedient behavior.
                – for Chapter 13 only an individual (human) with regular income.
                                – not involuntary.
                                – must meet debt limits.
                – 11 and 13’s can be converted to 7 (see EE p. 161); involuntary 7’s may be converted to 11 or 13.
                                – but must meet specific eligibility requirements of new chapter.
 
Venue (§ 1408)
– must file where one of the following was located for 180 days or the longest: [R BAD]                 – Residence, OR
                – Business: principal place, OR
                – Affiliate: where affiliate is having bankruptcy, OR
                                – “affiliate”: someone who owns 20% voting securities (not necessarily control) (by § 1408(2)).
                                – for judicial economy, but allows forum shopping.
                – Domicile.
– Even if right venue court can transfer for:
                – A. Convenience of parties, OR
                – B. Interest of parties.
                (- BR 1014).