Chapter 1: Legal Ethics
1
Learning Objectives
1. What is a prejudgment attachment?
What is a writ of execution? How does a
creditor use these remedies?
2. What is garnishment? When might a
creditor undertake a garnishment
proceeding?
3. In a bankruptcy proceeding, what
constitutes the debtor’s estate in
property? What property is exempt from
the estate under federal bankruptcy law?
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2
Learning Objectives
4. What is the difference between an
exception to discharge and an
objection to discharge?
5. In a chapter 11 reorganization, what is
the role of the debtor in possession?
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3
Introduction
 Liens.
 Garnishment.
 Creditors’ Composition
Agreements.
 Suretyship.
 Guaranty.
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4
Laws Assisting Creditors
 Liens.
–Encumbrance on property to satisfy a
debt or protect a claim for the
payment of debt. 
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5
Laws Assisting Creditors
 Liens.
– Mechanic’s Liens: security for labor,
materials, or service on real estate.
CASE 19.1 BHP LAND SERVICES, INC. V.
SEYMOUR (2011). What should Jean do next:
settle with BHP, go through foreclosure, or
appeal the case?
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6
Laws Assisting Creditors
 Liens.
–Artisan’s Lien. labor and materials on
personal property.
–Judicial Liens: arises out of a court
decision.
• Writ of Attachment: court orders sheriff to seize
non-exempt property. Writ of Execution: court
order to seize and sell debtor’s non-exempt real
and personal property to satisfy debt.
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7
Laws Assisting Creditors
 Garnishment: permits a creditor to
collect a debt by seizing property of
the debtor held by a third party
(garnishee).
–Typically the garnishee is the debtor’s
employer.
–Garnishment Proceedings governed by
state law.
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8
Laws Assisting Creditors
 Garnishment (cont’d).
–Laws Limiting the Amount of Wages
Subject to Garnishment.
• Both federal and state laws limit the
amount that can be taken out of a debtor’s
take home pay.
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9
Laws Assisting Creditors
 Creditors’ Composition Agreement.
–Creditors take less than owed on a
liquidated debt.
–Binding on those who agree because
consideration given by each depending
on one another.
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10
Laws Assisting Creditors
 Suretyship: promise by a third person
to be primarily liable for the debtor’s
obligation to the creditor.
–Express contract between surety and the
creditor.
–Creditor can demand payment from
surety at any time after debt is due.
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11
Laws Assisting Creditors
 Suretyship: (cont’d).
–Creditor need not exhaust all legal
remedies against the debtor before
holding the surety responsible.
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12
Ex. 19-1 Suretyship and
Guaranty Parties
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13
Laws Assisting Creditors
 Guaranty: third person making the
guaranty is secondarily liable.
–Guarantor is liable only after the
principal debtor defaults.
–Statute of Frauds requires guaranty to
be in writing, unless main purpose
exception applies.
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14
Laws Assisting Creditors
 Suretyship and Guaranty.
–Actions Releasing Surety and
Guarantor: same as those that will
discharge the guarantor.
–Defenses: Surety can use any of the
principal debtor’s defenses EXCEPT
incapacity, bankruptcy, or statute of
limitations. 
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15
Laws Assisting Creditors
 Suretyship and Guaranty.
–Defenses.
• Surety can use his own defenses, EXCEPT
fraud between debtor and surety that is
unknown by creditor.
• Material contract modification between
debtor and creditor will release a
gratuitous surety and a compensated
surety to the extent he suffers a loss. 
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16
Laws Assisting Creditors
 Suretyship and Guaranty.
–Rights of the Surety and Guarantor.
• Right of Subrogation.
• Right of Reimbursement.
• Right of Contribution.
–Sureties in equal amounts.
–Sureties in equal amounts, one or more cosureties missing or insolvent.
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17
Protection for Debtors
 Exempted Real Property.
–Homestead: state laws permit entirely
or up to a certain dollar amount.
 Exempted Personal Property.
–Household furniture up to certain limit.
–Clothing and personal possessions.
–Vehicle for transportation. 
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18
Protection for Debtors
 Exempted Personal Property (cont’d).
–Certain classified animals.
–Equipment debtor uses in a trade or
business, up to certain dollar amount.
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19
Bankruptcy Law
 Bankruptcy Courts.
 Types of Bankruptcy Relief.
 Special Requirements for Consumer
Debtors.
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20
Bankruptcy Law
 Chapter 7 – liquidation.
 Chapter 11 – reorganizations.
 Chapter 12 - adjustment of debts of
family farmers and fishermen with
regular incomes.
 Chapter 13 - adjustment of debts of
individuals with regular incomes.
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21
Chapter 7-Liquidation
 Chapter 7: referred to as ordinary or
straight bankruptcy.
–Debtor turns all assets over to the
bankruptcy trustee.
–Trustee sells nonexempt property and
distributes the proceeds to the
creditors. Remaining debts are
discharged.
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22
Chapter 7-Liquidation
 Available for any person, individual,
corporation, partnership.
 Railroads, insurance companies,
banks, savings and loan and
investment companies licensed by
the SBA, and credit unions cannot be
debtors.
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23
Chapter 7-Liquidation
 Straight bankruptcy is commenced by
the filing of a voluntary or involuntary
petition in bankruptcy with the
bankruptcy court.
–If a debtor files the petition, it is
voluntary. 
–If creditors file a petition, it is
involuntary. 
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24
Chapter 7-Liquidation
 Voluntary Bankruptcy.
–Prior to filing, debtor(s) must receive
credit counseling within 180 days of
filing, and submit certificate.
–Debtor must confirm accuracy of
contents; attorney must file affidavit
informing debtor about other chapters.
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25
Chapter 7-Liquidation
 Voluntary Bankruptcy.
–Chapter 7 Schedules.
1. A list of both secured and unsecured
creditors, their addresses, and the amount
of debt owed to each.
2. A statement of the financial affairs of the
debtor.
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26
Chapter 7-Liquidation
 Voluntary Bankruptcy.
–Chapter 7 Schedules.
• A list of both secured and unsecured creditors,
their addresses, and the amount of debt owed
to each.
• A statement of the financial affairs of the
debtor.
• A list of all property owned by the debtor,
including property claimed by the debtor to be
exempt. 
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27
Chapter 7-Liquidation
 Voluntary Bankruptcy.
–Chapter 7 Schedules.
• A listing of current income and expenses
• A list of all property owned by the debtor,
including property claimed by the debtor to
be exempt.
• A certificate of credit counseling (as discussed
previously). 
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28
Chapter 7-Liquidation
 Voluntary Bankruptcy.
–Chapter 7 Schedules.
• A statement of the amount of monthly
income, itemized to show how the amount is
calculated.
• A copy of the debtor’s federal income tax
return for the most recent year ending
immediately before the filing of the petition.
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29
Chapter 7-Liquidation
 Voluntary Bankruptcy.
–Tax Returns During Bankruptcy.
–Substantial Abuse—Means Test: to
determine whether debtor’s petition will be
dismissed under Chapter 7.
• Basic Formula: debtor’s average monthly
income is compared to median income in
area where he lives. If below median
income, no presumption of abuse. 
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30
Chapter 7-Liquidation
 Voluntary Bankruptcy.
–Substantial Abuse—Means Test (cont’d)
• Applying the Means Test to Future
Disposable Income: if debtor’s income is
above the median income, then further
calculations are necessary, including
calculations of disposable income. 
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31
Chapter 7-Liquidation
 Voluntary Bankruptcy.
–Additional Grounds for Dismissal.
• Conviction of violent crime or drugtrafficking.
• Debtor fails to pay post-petition domesticsupport obligations.
–Order for Relief.
• If filing is proper, filing itself is an order for
relief
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32
Chapter 7-Liquidation
 Involuntary Bankruptcy.
–Creditors force debtor into bankruptcy.
• If there are 12 or more creditors, need
three or more with unsecured claims
totaling at least $14,425 to join in petition.
If less than 3 creditors, one or more
creditors with $14,425 debt may file.
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33
Chapter 7-Liquidation
 Involuntary Bankruptcy.
–Debtor can challenge involuntary
bankruptcy but court will enter an order
for relief if:
• Debtor is not paying debts as they come
due, OR
• The debtor was in receivership for the 120
days before filing the petition.
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34
Chapter 7-Liquidation
 Automatic Stay.
–The moment a petition is properly filed,
an automatic stay is granted protecting
debtor from all creditors.
• Creditors cannot commence or continue
most legal actions.
• Damages for knowing violation of stay. 
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35
Chapter 7-Liquidation
 Automatic Stay.
–Adequate Protection Doctrine: protects
secured creditors from losing their
security interest due to the automatic
stay. 
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36
Chapter 7-Liquidation
 Automatic Stay.
–Exceptions to the Automatic Stay.
• Domestic Support Obligations.
• Proceedings against Debtor related to divorce,
support, custody, and maintenance.
• Investigations by securities regulatory agency.
–Limitations on the Automatic Stay.
• Secured party can petition bankruptcy court for
relief from automatic stay.
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37
Chapter 7-Liquidation
 Bankruptcy Estate.
–Debtor’s Estate includes:
• All Debtor’s legal and equitable interests in
property presently held, including
community property;
• Property transferred in a “voidable”
transaction; and
• Property which Debtor becomes entitled
within 180 days after filing. 
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38
Chapter 7-Liquidation
 Bankruptcy Estate.
–Debtor’s Estate includes:
• Proceeds and profits from the property of
the estate.
• After-acquired property such as
inheritances, property settlements, and life
insurance death proceeds.
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39
Chapter 7-Liquidation
 Bankruptcy Estate.
–Debtor’s Estate includes:
• Proceeds and profits from the property of
the estate.
• After-acquired property such as
inheritances, property settlements, and life
insurance death proceeds.
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40
Chapter 7-Liquidation
 Bankruptcy Trustee.
–Appointed by Court: duties include
collecting assets and paying creditors in
order of priority.
• Duties for Means Testing: to determine
whether there is substantial abuse. Must
file statement within 10 days after 1st
meeting with creditors.
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41
Chapter 7-Liquidation
 Bankruptcy Trustee.
–Trustee’s Powers: has right to ‘strong arm’
creditors return debtor’s property to trustee.
• Has “Avoidance Powers” to set aside
certain transfers:
–Voidable Rights. 
–Preferences. 
–Fraudulent Transfers. 
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42
Chapter 7-Liquidation
 Bankruptcy Trustee.
–Trustee’s Powers.
• Voidable Rights: Trustee can stand in shoes of
debtor and assert any lack of capacity or lack of
assent. 
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43
Chapter 7-Liquidation
 Bankruptcy Trustee.
–Trustee’s Powers.
• Preferences.
–Debtor is not permitted to transfer property or
make a payment that favors—or gives a
preference to—one creditor over another.
–For a Trustee to recover payment, debtor must
be insolvent and transferred property for
preexisting debt within previous 90 days.
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44
Chapter 7-Liquidation
 Bankruptcy Trustee.
–Trustee’s Powers.
• Preferences.
– Preferences to Insiders: avoidance power of Trustee
extends to transfers made within ONE YEAR before
filing.
– Transfers That Do NOT Constitute Preferences:
payments for services within 15 days, payments
made in ordinary course of business, and generally
debts that are not preexisting.
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45
Chapter 7-Liquidation
 Bankruptcy Trustee.
–Trustee’s Powers.
• Fraudulent Transfers. Trustee may avoid
fraudulent transfers if made: (1) within two
years of filing of petition, or (2) with actual intent
to hinder, delay or defraud a creditor.
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46
Chapter 7 - Exemptions
(See Pages 376-377)
1. Up to $21,625 in equity in the debtor’s
residence and burial plot (the
homestead exemption).
2. Interest in a motor vehicle up to
$3,450.
3. Interest, up to $550 for a particular
item, in household goods and personal
effects (up to $11,525). 
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Chapter 7 - Exemptions
(See Pages 376-377)
4. Interest in jewelry up to $1,450.
5. Interest in any other property up to
$1,150, plus any unused part of the
$21,625 homestead exemption up to
$10,825.
6. Interest in any tools up to $2,175.
7. A life insurance contract owned by the
debtor. 
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Chapter 7 - Exemptions
(See Pages 376-377)
8. Certain interests in accrued dividends
and interest not to exceed $11,525.
9. Professionally prescribed health aids.
10.Social Security and other benefits.
11.The right to receive certain personalinjury and other awards up to $21,625.
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49
Chapter 7-Liquidation
 Homestead Exemption.
–Places limits on the amounts of home
equity debtors can shield from creditors.
–Debtor must have lived in state two
years prior to filing.
–Maximum equity: $146,450, if within
previous 3.5 years of filing.
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50
Chapter 7-Liquidation
 Creditors’ Meeting and Claims.
–Trustee calls meeting of creditors, to
examine debtor under oath.
–Creditors’ Claims: to receive a portion of
debtor’s estate, each creditor must file a
proof of claim. Necessary if there is any
dispute.
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51
Chapter 7-Liquidation
 Distribution of Property.
–Debtor must file a statement of
intention regarding secured collateral.
• Distribution to Secured Creditors.
• Distribution to Unsecured Creditors: paid
in the order of their priority. If any amount
is left over, it is returned to debtor.
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52
Ex. 19-2 Distribution of Property
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Chapter 7-Liquidation
 Discharge.
–Exceptions to Discharge: discharge of a
debt may be denied.
–Objections to Discharge: court may deny
claims based on debtor’s conduct.
–Effect of Discharge: voids, or sets aside
any judgment and prohibits any collector
action. 
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Chapter 7-Liquidation
 Discharge and Reaffirmation.
–Revocation of Discharge.
–Reaffirmation of Debt: debtor agrees to
pay a debt in bankruptcy by executing a
reaffirmation agreement.
• Reaffirmation Procedures: before
discharge.
• Reaffirmation Disclosures.
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55
Chapter 11-Reorganizations
 Chapter 11—Corporations. Debtor
and Creditors formulate a plan under
which the Debtor pays a portion of its
debts and is discharged of the rest.
–Same debtors as are eligible under
Chapter 7. 
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56
Chapter 11-Reorganizations
 “Fast Track” Chapter 11 for small
business debtors whose liabilities do
not exceed $2 million and who do not
own or manage real estate.
 Workouts: focus is on the Best
Interests of the Creditors. 
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57
Chapter 11-Reorganizations
 Debtor in Possession (DIP): business
operates under court supervision.
–DIP has same powers as trustee.
–But court may appoint trustee (receiver)
with ‘strong arm’ powers.
 Creditors Committees.
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58
Chapter 11-Reorganizations
 Reorganization Plan.
–Plan must be fair and equitable to all
parties.
• Filing the Plan: within 120 days after date
relief order.
• Acceptance and Confirmation of the Plan.
–Discharge.
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Bankruptcy Relief under
Chapter 13 and Chapter 12
 Chapter 12: Family Farmer and
(Fisherman, 2005) Plans.
–“Family Farmer” (Or Fisherman): 50% of
gross income comes from farming (or
fishing) and whose debts are 80% farm
(commercial fishing) related.
–Procedure for filing.
–Content of plan.
–Court confirmation.
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Bankruptcy Relief under
Chapter 13 and Chapter 12
 Chapter 13: Individuals’ Repayment
Plans. Not for partnerships,
corporations.
–For individuals with regular income who
owe fixed unsecured debts of <$360,475
or fixed secured debts of <1,081,400. 
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Bankruptcy Relief under
Chapter 13 and Chapter 12
 Chapter 13 (continued).
–Filing the Plan: within 120 days after
order of relief.
–Acceptance and Confirmation of the
Plan: court may refuse to accept or
accept with “cram down.” 
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Bankruptcy Relief under
Chapter 13 and Chapter 12
 Chapter 13 (continued).
–The Repayment Plan must:
• Turn over to trustee the future earnings of
debtor as necessary for execution of plan.
• Full payment through deferred cash payments of
all claims entitled to priority, including taxes.
• CASE 19.2 RANSOM V. FIA CARD SERVICES,
N.A. (2011). Why was Ransom’s plan
denied?
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Bankruptcy Relief under
Chapter 13 and Chapter 12
 Chapter 13 (continued).
–Discharge: after debtor has completed
all payments, court grants discharge.
–CASE 19.3 UNITED STUDENT AID FUNDS,
INC. V. ESPINOSA (2010). Why wasn’t
Espinosa’s plan ‘void’?
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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