dynamic business law essentials 3e 2016 chapter 19

Chapter 19 Ethical DilemmaEffective October 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 BAPCPA represents the most sweeping change to the United States Bank

Chapter 19

Secured Transactions and

Bankruptcy

Chapter 19 Ethical Dilemma

Effective October 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) represents the most sweeping change to the United States Bankruptcy Code in almost forty years Applauded by the credit card industry, which had lobbied the United States Congress for several years before its enactment, the BAPCPA makes it extremely difficult, if not impossible, for middle income Americans to file for Chapter 7 (“liquidation”) bankruptcy (Traditionally, the United States Bankruptcy Court used Chapter 7 for debtor rehabilitation, allowing the debtor to discharge pre-existing debts in return for his/her relinquishment of non-exempt property, and the non-exempt property was used to partially satisfy creditor claims.) Instead, the BAPCPA channels bankrupt debtors into Chapter 13

(“reorganization”) bankruptcy, with strict restrictions against debt forgiveness.

The BAPCPA has come under criticism, in part because it allows no exceptions for unanticipated medical expenses (a Harvard University study concluded that more than fifty percent of bankruptcies are attributable to unpaid medical bills,) loss of employment, or financial difficulties resulting from dissolution of marriage BAPCPA critics argue that individuals so affected should be allowed to file Chapter 7 (“liquidation”) bankruptcy protection Critics further contend

that without such a change in the BAPCPA, the only real discharge for many debtors will be death.

From a legal standpoint, should the United States Congress rewrite the BAPCA and create exceptions for

unanticipated medical expenses, loss of employment, or financial difficulties resulting from dissolution of marriage (and allow the bankrupt debtor to file for Chapter 7 bankruptcy protection?) From an ethical standpoint, should not our society “give these people a break?” Are not such people, and their financial situations, substantially different from

consumers who “max out” their credit cards on “mad shopping sprees?”

(For reference, see http://www.cch.com/bankruptcy/Bankruptcy_04-21.pdf )

Chapter 19 Internet Research Exercise

Go to http://www.thebankruptcysite.org/bankruptcy-exemptions and research the Chapter 7 bankruptcy exemptions allowed in your particular state (“Exemptions” represent property the debtor is allowed to keep, even though he/she is filing for Chapter 7 liquidation bankruptcy.) Based on your research, are your state’s Chapter 7 exemptions more or less generous than the federal bankruptcy

exemptions outlined in Exhibit 19-6 of the textbook?

Although bankruptcy is primarily a matter of federal jurisdiction (delegated to the federal government

in Article I, Section 8 of the United States constitution), the federal government does allow the individual states to craft their own Chapter 7 exemptions for individuals filing in their particular state

If the state chooses to enact its own Chapter 7 exemptions, the state can then require those filing in its jurisdiction to use the state exemptions, or it can allow the bankrupt debtor to choose the federal exemptions outlined in Exhibit 19-6 of the textbook If the state chooses not to enact its own Chapter

7 exemptions, the federal exemptions apply by default.

In your reasoned opinion, should Chapter 7 bankruptcy exemptions be uniformly applied in all states (by applying the federal bankruptcy exemptions in every state), or do you favor the idea of allowing

the individual states to craft their own Chapter 7 exemptions?

Chapter 19 Case Hypothetical

Jerry Eller purchases a laptop computer for $995 from the local Preferable Purchase electronics store He charges the $995 amount on Preferable Purchase “instant credit,” and the store has guaranteed him no finance charges

if he pays the $995 amount within one year from the date of purchase.

Jerry purchased the computer for use in his business, Eller’s Civil War

Battlefield Tours, Inc On any given week, Eller uses the laptop approximately

20 hours for the purposes of Eller’s Civil War Battlefield Tours, Inc., and 10 hours to play the online video game “Gloom” (his favorite hobby.) One year passes, and Jerry does not pay any of the credit balance After repeated attempts by Preferable Purchase’s Credit Department to collect on the debt,

Jerry still refuses to pay.

Does Preferable Purchase have a perfected security interest in the laptop computer? If not, why not? If so, what advantage(s) does that afford Preferable

Purchase?

Chapter 19 Case Hypothetical

On September 7, 2013, Albert O’Leary extended a $10,000 loan to his

friend Corey Johnson As security for the loan, Corey gave a

document to Albert with the following language:

“I, Corey Johnson, hereby give a security interest in my 2012 Chevrolet Camaro to Albert O’Leary in return for his $10,000 loan to me on

September 7, 2013 Signed, Corey Johnson.”

Does Albert O’Leary have a perfected security interest in Corey

Johnson’s 2012 Chevrolet Camaro?

Secured Transactions: Definitions

•Secured Interest: Interest in personal property/fixtures which secures

Collateral Under UCC

•Goods (Consumer goods, farm products, inventory, equipment, fixtures, and accessories)

•Indispensable Paper (Documents of title, negotiable instruments, investment property, and chattel paper)

•Intangibles (Accounts, goodwill, literary rights)

•Proceeds

Creation (Attachment) of Security

“Purchase-Money” Security

Interest

Definition: Interest formed when debtor uses borrowed money (e.g., buying on credit) from secured party to

buy collateral

“Perfected” Security Interest

Definition: Security interest in which creditor has legally protected his/her

claim to collateral

•Perfection By Possession: Perfection of interest

by holding collateral of debtor until loan is paid in full

Methods of Perfection

(Continued)

•Automatic Perfection: Perfection that automatically occurs when retailer sells a consumer good

•Perfection of Movable Collateral: Collateral that moves to another state must be “re-

perfected” after four (4) months

Perfection of Security Interests in

Automobiles and Boats:

Note interest on certificate of title

Scope of Security Interest

•After-Acquired Property: Creditor has security interest in property acquired by debtor after security agreement made, if clause to this effect included in agreement

•Proceeds: Creditor automatically has rights

to proceeds from sale of collateral for ten (10) days

Termination Statement

Definition: An amendment to a financing statement stating debtor has

no further obligation to secured party

party will almost always have right to collateral,

Priority Disputes (Continued)

Secured Party Versus Buyer: If debtor sells his collateral, creditor may dispute with buyer over collateral

•Buyer in “Ordinary Course of Business”: If person buys collateral in ordinary course of business

without realizing that it is collateral, he/she has right to good

•Buyers of Consumer Goods: If consumer does not know product secured, buyer’s new product is free from security interest

•Buyers of Chattel Paper and Instruments: If buyer

Occurs when debtor fails to fulfill his/her loan;

remedies include:

•Taking possession of collateral: If debtor defaults

on loan, secured party can take possession of collateral

-Disposition of Collateral: Creditor may sell, lease, or transfer collateral

-Retention of Collateral: Creditor may choose to keep collateral as payment of debt

•Proceeding to Judgment: Secured party may sue

Bankruptcy and Reorganization

The Purpose of The Bankruptcy Act

And Its Goals

•Provide protection to creditors

•Provide opportunities for debtors to gain a “fresh financial start”

Bankruptcy Law Is A Matter Of

Federal Jurisdiction

United States Constitution Article I, Section 8:

“Congress shall have the power…To establish…uniform laws on the subject of bankruptcies throughout the United States”

The Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005

Types of Bankruptcy Relief

•Chapter 7 Bankruptcy: Sale of debtor’s non-exempt assets by trustee, and distribution of money to creditors

•Chapter 9: Adjustment of municipalities’ debts

•Chapter 11 Bankruptcy: Reorganization of debtor’s financial affairs under supervision of bankruptcy court

•Chapter 12 Bankruptcy: Reorganization of family farmer/

fisherman’s debts

•Chapter 13 Bankruptcy: Reorganization of individual’s debts

Chapter 7 Bankruptcy: “Voluntary”

Versus “Involuntary” Petition

•Voluntary Petition: Debtor files

•Involuntary Petition: Creditor(s) file, forcing debtor into bankruptcy

Chapter 7 Bankruptcy Terminology

•Automatic Stay: Moratorium on creditor litigation against debtor outside bankruptcy case

•Order of Relief: Court order allowing bankruptcy proceedings to continue

•Creditors’ Meeting: Meeting of all creditors listed in Chapter

7 schedules for liquidation

•Trustee: Party responsible for collecting debtor’s exempt, pre-filing assets, and liquidating property to cash that will be distributed among creditors

non-•Exempt Property: Property debtor allowed to retain

Federal Bankruptcy Exemptions

•Up to $21,625 for residence (“homestead”

exemption)

•Interest in motor vehicle up to $3,450

•Interest, up to $550 for particular item, in personal and household goods (aggregate total limited to $11,525)

•Interest in jewelry up to $1,450

Federal Bankruptcy Exemptions (Continued)

•Up to $2,175 in “tools of trade” and professional books

•Any unmatured life insurance contract owned by debtor

•Professionally prescribed health aids

•Right to receive certain personal injury awards

up to $21,625

•Retirement funds in IRA/SEP up to $1,171,650

Voidable Transfers

•Preferential Payments: Trustee can recover (and include in bankruptcy estate) payments made by insolvent debtor that give preferential treatment to one creditor over another, if debtor made such payments within 90 days of bankruptcy filing

•Fraudulent Transfers: Trustee can recover (and include in bankruptcy estate) transfers made with intent to defraud creditors, if debtor made such transfers within two years of bankruptcy filing

Classes of Priority Claims Among

Unsecured Creditors

•Class 1: Alimony/child support

•Class 2: Court costs, trustee fees, attorney, fees, other costs associated with administration of bankruptcy estate

•Class 3: Unsecured claims in involuntary bankruptcy that arise through debtor’s ordinary business expenses, from date of filing petition to date of trustee appointment

•Class 4: Unsecured claims for unpaid wages, salaries, and commissions earned within 180 days of filing of

petition

•Class 5: Unsecured claims for contributions to employee

Classes of Priority Claims Among Unsecured Creditors (Continued)

•Class 6: Unsecured claims by farmers and fishers against grain operators of grain storage facilities/fish storage/processing facilities

•Class 7: Claims for deposits given to debtor in connection with property/services never given

•Class 8: Certain taxes and penalties due government

•Class 9: Claims in bankruptcies related to federal depository institutions

Non-Dischargeable Debts Under The

Non-Dischargeable Debts Under The

Bankruptcy Code (Continued)

•Claims of willful/malicious conduct by debtor that caused injury to another person/property

•Specific student loans, unless payment of loans would impose “undue hardship” on debtor

•Judgments against debtor for claims resulting from debtor’s driving under the influence

•Debts not discharged in previous bankruptcies

•Claims for money borrowed to pay tax to federal