Creditors’ Rights and Bankruptcy
Chapter 15
Secured Transactions
• Article 9 of UCC
• A transaction in which the payment of a
debt is secured by collateral.
Secured Transactions
Collateral
– Property, including accounts and chattel
paper (i.e., a note evidencing a debt
secured by personal property), which is
subject to a security interest.
Secured Transactions
Security Interest
– An interest in personal property or
fixtures which secures payment or
performance of an obligation.
Secured Transactions
Security Agreement
– An agreement creating or memorializing
a security interest granted by a debtor to a
secured party.
Secured Transactions
Secured Party/Creditor
– A lender, seller, or any other person who
is a beneficiary of a security interest,
including a person to whom accounts or
chattel paper has been sold.
Creating A Security Interest
• Collateral must be in possession of Creditor or
there must be a written agreement describing the
collateral signed by Debtor.
– Creditor must give something of value to Debtor.
– Debtor must have “rights” in collateral.
• Once these requirements are met, the creditor’s
rights “ATTACH” to the collateral, giving the
creditor an enforceable security interest.
Perfection of Security Interest
• Perfection - process by which secured
parties protect their security interests in
collateral against the claims of third parties
who may look to the same collateral to
satisfy the debtor’s obligations to them.
Perfection of Security Interest
• A secured party can perfect a security
interest by filing a financing statement with
the appropriate state office.
• Financing Statement
– A document filed under the debtor’s
name to give notice to third parties that
the creditor claims an interest in the
collateral.
Perfection of Security Interest
• A financing statement contains the
following:
– The names and addresses of both the
debtor and the secured party
– A description of the collateral
Perfection of Security Interest
Perfection Without Filing
• By Possession
• Purchase-Money Security Interest (PMSI)
- automatically perfected in consumer
goods upon attachment
Scope Of Security Interests
• In addition to covering collateral already in
the debtor’s possession, a security
agreement can cover other property and
crate a “floating lien.”
– Proceeds of Collateral
– After Acquired Property
– Future Advances of Debt
Priorities
• Perfected vs. Unperfected Security Interests
– When one secured party has a perfected
security interest in collateral and another
secured party has an unperfected security
interest in the same collateral, the
perfected interest prevails.
Priorities
• Conflicting Perfected Security Interests
– When two or more secured parties have
perfected security interests in the same
collateral, generally the first to perfect
(by filing or possession) has priority.
Priorities
• Conflicting Unperfected Security Interests
– When two or more secured parties have
unperfected security interests in the same
collateral, generally the first to attach has
priority.
Remedies On Default
• Default - A debtor’s failure to pay a debt
when due and/or a secured party’s failure to
discharge a debt when paid.
Remedies On Default
• Repossession - A secured party can take
possession of the collateral and either (i)
retain it for satisfaction of the debt, or (ii)
resell it and apply the sale proceeds to the
debt remaining.
Disposition Procedures
• A secured party who chooses to dispose of
collateral must do the following:
– Sell it in a commercially reasonable
manner, and
– Notify the debtor of the time and place of
the sale (to allow the right of redemption
of debtor to be exercised).
Disposition Procedures
• Proceeds from disposition must be applied
as follows:
– Reasonable expenses of retaking,
holding, or preparing for sale
– Satisfaction of the debt due to the secured
party
– Satisfaction of other secured creditors
– Any surplus to the debtor
Disposition Procedures
• If some of the debt remains unsatisfied after
all of the collateral has been disposed of, the
secured creditor may obtain a deficiency
judgment against the debtor.
Additional Laws For Creditors
• Liens:
– Mechanic’s Lien (real property).
– Artisan’ Lien (personal property).
– Innkeeper’s Lien (baggage of guests).
– Judicial Lien:
• Attachment: court-ordered seizure of
property.
• Writ of Execution: court-ordered sale.
• Garnishment.
– Creditor permitted to collect a debt by seizing
property held by third party (usually wages held
by debtor’s employer).
Additional Laws For Creditors
• Suretyship
-Contract in which third party agrees to be
responsible for obligation of a party to a
contract.
-Examples include guaranty, surety bond,
etc.
-Must be in writing under Statute of Frauds
Rights of Debtors
• Homestead Protection
• Household furniture up to a specified dollar
value
• Other Personal Property such as autos,
animals, tools of trade
Bankruptcy
• Voluntary Bankruptcy
– A debtor who finds himself or herself
unable to pay debts as they become due
may voluntarily petition for bankruptcy.
• Involuntary Bankruptcy
– A bankruptcy petition may be filed
against a debtor by his or her creditors.
Automatic Stay
• Once a bankruptcy petition is filed
voluntarily or involuntarily, virtually all
other litigation or other action by creditors
or potential creditors against the debtor or
the debtor’s property are suspended until the
bankruptcy is resolved and the stay is lifted.
Bankruptcy
• Chapter 7 Liquidation - The sale of all nonexempt
assets of a debtor and distribution of the proceeds
to the debtor’s creditors (can chose between
federal exemptions and state exemptions).
• Priorities in Distribution:
– Secured Creditors
– Categories of Unsecured Creditors
• Discharge of Debtor
Bankruptcy: Discharge
• There are a number of non-dischargeable
debts, including back taxes, alimony and
child support, student loans, and consumer
credit obtained within 60 days of filing.
Means Testing and other Fairness
Issues
-must use federal homestead exemption if filing
within 40 months of buying a new home (limited
to $146,500), but can be waived if home was
bought with proceeds form a home previously
homesteaded in that state)
-must live in a state for two years before using the
state’s homestead exemption
-must have income below median income of the
state to chose Chapter 7
-must attend credit counseling before and after
bankruptcy
Bankruptcy: Chapter 11
• Under Chapter 11 reorganization, business
debtor and its creditors formulate a plan in
which the debtor repays a portion of its
debts and is discharged from the remainder.
• Reorganization Plan - A plan to conserve
and administer the debtor’s assets in the
hope of an eventual return to successful
operation.
Bankruptcy: Chapter 13
• Wage-Earner Plan
– Individuals with regular income who owe fixed
unsecured debts of less than $336,900 or fixed
secured debts of less than $1,010,650 may
voluntarily petition the bankruptcy court for
relief under Chapter 13.
Creditors’ Rights and Bankruptcy
End of Chapter 15