Creditor’s Rights, Duties & Liabilities

Laws Assisting Creditors

LIENS

• Lien: An encumbrance on real property or personal property to secure a debt or to protect a claim for payment of a debt. It is a claim or charge on the debtor’s property that must be satisfied before the property is available to satisfy the claims of other creditors.

• Mechanic’s Lien: A lien on real property or personal property to ensure payment for work performed and materials furnished in the repair or improvement of real or personal property. Has priority over perfected security interests unless a statute provides otherwise.

• Artisan’s Lien: A lien on personal property to ensure payment for services performed to repair, improve, and/or enhance the value of the personal property. Has priority over perfected security interests unless a statute provides otherwise. It is possessory in nature. The leinholder has to maintain possession of the property.

• Innkeeper’s Lien: A possessory lien on the luggage, and contents thereof, of a hotel’ s guest for unpaid hotel charges.

• Judgment Lien: A lien obtained by judicial order in favor of a creditor:

• Writ of Attachment [4412]: A court order to seize and take into custody property of the debtor prior to the issuance of a judgment lien. (prejudgment) – requires an affidavit showing the creditor is in default and that the property is at jeopardy and also the posting of a bond. Not sold yet to satisfy the claim, but “safeguarded” until the suit is decided.

• Writ of Execution [4413]: A court order, following the issuance of a judgment lien, to seize and sell property of the debtor, by an officer of the court (sheriff, etc) to levy/seize property.

PROTECTION FOR DEBTORS

Certain property of the debtor is Exempt from seizure by a creditor.

For example, there is the homestead exemption (more about this in bankruptcy below).

Usually household furnishing are exempt, clothing, many personal possessions, and a vehicle (if clear), certain livestock and pets, and equipment used by a person to make a living.

GARNISHMENT, COMPOSITION, AND

FORECLOSURE [4415,4416]

• Garnishment: Legal process used by a creditor to collect a debt by seizing property of the debtor (e.g., wages) being held by a third party (e.g., the debtor’s employer).

• Both state and federal laws restrict the amount of money that can be garnished from a debtor’s paycheck. NOTE: It is very limited in Texas except for certain things, such as child support and taxes.

• Composition Agreement 4416 : A negotiated agreement between a debtor and his or her creditors by which the creditors agree to accept a lesser sum than that owed in full satisfaction of the debt. Usually done in bankruptcy.

• Foreclosure: A mortgage holder (the mortgagee) has the right, subject to state law, to foreclose on mortgaged property in the event that the debtor (the mortgagor) defaults.

• Foreclosure is typically accomplished by seizing the property and selling it by judicial sale.

• If the proceeds of the sale are not sufficient to satisfy the mortgage, the mortgagee may seek a deficiency judgment to collect the balance due from the debtor.

• Assignment for Benefit of Creditors: A debtor may assign his or her assets to a trustee for the benefit of the debtors creditors. This is a voluntary action, usually in bankruptcy.

Fair Debt Collection Practices Act

Federal law dealing with CONSUMER DEBT. That is, family or personal household type as opposed to real estate. Commercial debt (company) is not covered.

If creditors collect their own debts, they are not covered, but if it is farmed out, the act covers. In other words, debt collectors.

Notice the various restrictions (disputes; not calling before 8am not after 9:00pm; 3^rd party communications, ) at 4419.06 --.11. (discussion)

SURETYSHIP AND GUARANTY[4420-6]

• Suretyship 4422.02: An express promise by a third party (the surety) to a creditor to be primarily responsible for the debtor’s obligation to the creditor. Simply put, the third party is completely and primarily responsible for the debt of the principal.

• Guaranty 4422.01: An express promise by a third party (the guarantor) to a creditor to be secondarily responsible for the debtor’s obligation to the creditor -- that is, to pay the debt if, but only if, the debtor defaults. A guaranty may be:

• Continuing (designed to cover a series of transactions) or specific (designed to cover a particular transaction);

• Unlimited or limited as to time and amount; and

• Absolute (guarantor’s liability arises automatically) or conditional (guarantor’s liability arises only on the occurrence of some event, such as default).

• Defenses of Sureties and Guarantors: Sureties and guarantors are entitled to assert the same defenses against payment as the debtor (e.g., fraudulent inducement, material modification, satisfaction, rejected tender of payment), except for (i) bankruptcy of the debtor and (ii) limitations.

RIGHTS OF SURETIES AND GUARANTORS [4427-4430]

• Subrogation: The right of a guarantor or surety to stand in the shoes of or be substituted for another party, typically the creditor, and assume all of that party’s rights with respect to a particular transaction or series of transactions. In other words, any right that the creditor had against the debtor now becomes the right of the surety.

• Reimbursement: The right of a guarantor or surety to be restored, repaid, or indemnified for costs, expenses, or losses expended or incurred on behalf of the debtor.

• Contribution: The right of a co-surety or co-guarantor (where two or more persons are acting as surety or guarantor) to recover from his or her co-surety(-ies) or co-guarantor(s) any costs, expenses, or losses expended or incurred on behalf of the debtor greater than his or her proportionate share.

Surety Bonds 4431

Acknowledgement of obligation to make good a performance or duty by another if they do not do it. For example:

Performance bonds- ensures work will be done

Payment- ensures payment will be made

Fidelity bonds- dishonesty protection

Judicial bonds (bail, appeal, etc.)

Bankruptcy 4440

(>>>>>as currently existing. A major rewrite of the bankruptcy code was taking place currently and would have passed if not for 9/11/01<<<<<<)

Bankruptcy: rationale: it is “impossible” to pay the debt based on the persons’ wealth and income. Designed to give the person a second chance, originally intended to help parties due to massive medical bills, layoffs, and the like (things out of their control). Unfortunately, the bankruptcy laws have been manipulated by some to give them an unfair advantage. Various attempts at change have never completely become law.

There are three main types of Bankruptcy:

· Liquidation: Chapter 7

· Reorganization: Chapter 11

· Adjustment of Debts to those with income [Repayment]: Chapter 13 and 12 (farmers) (chapter 12 is now obsolete)

Chapter 7 Bankruptcy may be voluntary or involuntary:

INVOLUNTARY BANKRUPTCY-Liquidation 4447

• Involuntary Bankruptcy: Ch 7- A bankruptcy petition may be filed against a debtor by his or her creditors.

• If the debtor has twelve or more creditors, the petition must be filed by three or more creditors having unsecured claims totaling at least $10,775.

• If the debtor has fewer than twelve creditors, the petition must be filed by one or more creditors having unsecured claims totaling at least $10,775.

• If the debtor challenges the bankruptcy, the court will hold a hearing and enter an order against the debtor if:

(1) The debtor is generally not paying debts as they become due, or

(2) A receiver, custodian, or assignee took possession of, or was appointed to take charge of, substantially all of the debtor’s property within 120 days prior to the filing of the bankruptcy petition.

AUTOMATIC STAY

• 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. This includes the IRS.

• If a creditor knowingly violates the automatic stay, any party injured thereby is entitled to recover actual damages, costs, and attorneys’ fees from the violator.

• Adequate Protection Doctrine: Ensures that a secured creditor’s security interest is not lost as a result of a debtor’s automatic stay.

BANKRUPTCY: LIQUIDATION

• Liquidation- Ch 7: The sale of all nonexempt assets of a debtor and distribution of the proceeds to the debtor’s creditors.

• With certain exceptions, any debts not satisfied by the liquidation proceeds are discharged, meaning that the debtor is no longer obligated to repay them.

Property of the Estate 4448

• Bankruptcy Estate: Once a bankruptcy proceeding begins, the following legal and equitable interests in property, subject to certain exemptions, become property of the bankruptcy estate:

(1) Property currently held by the debtor;

(2) Jointly-held property;

(3) Property transferred by the debtor within one year prior to the filing of the petition;

(4) proceeds and profits from the use or sale of property of the estate; and

(5) certain interests in property to which the debtor will become entitled within 180 days after the filing- including inheritances, life insurance proceeds, gifts.

Creditor Meetings and Claims

Each creditor must file a proof of claim against the debtor within 90 days of the bankruptcy. Any legal obligation of the debtor is a claim.

PROTECTION FOR DEBTORS 4449

Note: this discussion is more Texas Law than the federal law, which is noted under 4449. Generally, in Texas bankruptcies, the following is accurate, while the text’s federal version applies across the country. In other words, Texas state law expands the federal law in certain cases.

• Homestead Exemption: In Texas (not federal) permits a debtor to retain his or her family home (and 10 acres if in town or 200 acres in the country, assuming they are contiguous) [note, we are assuming the house or property is free and clear, not mortgaged], as well as certain personal property, free from claims of unsecured creditors and trustees in bankruptcy. This is why the big fight over 2^nd mortgages a few years ago. In addition to the home itself, Texas statutes typically protect the following:

In general, you can keep up to approximately $60,000 in personal property (If married, $30,000 if single), which includes

• Household furniture,

• Clothing and certain personal possessions, such as family heirlooms or a Bible,

• Equipment used by the debtor in his or her business or trade

And also including [within the definition of personal property]: subject to overall limits

In Texas, you can keep up to $15,000 in jewelry),

Two firearms

Athletic and sporting equipment

Two wheeled, three wheeled, and 4 wheeled motor vehicle (notice this includes autos and trucks) for each member of the family.

Two horses, mules or donkeys and a saddle, blanket and bridle for each

12 head of cattle

60 head of other types of livestock

120 fowl.

Household pets

[ALL of this UP TO THE TOTAL OF $60,000 if married, $30,000 if single]

FURTHER:

You have UNLIMITED protection for your retirement accounts.

Life insurance policies are also protected, including proceeds to be paid to you (not just a policy you own).

Annuities are totally protected.

Current wages from employment are also protected unless otherwise ordered due to child support, alimony or other types of support.

èEXCEPT FOR THE IRS!!!

The Trustee 4444

Perhaps the most thankless job around, the trustee must secure the assets and sell them at the highest price to pay the most money to the creditors.

The trustee has tremendous powers to void rights of creditors (due to fraud, duress, mistake, incapacity, etc), and avoid preferences: where a creditor has made payment to one creditor in preference over another, that creditor may be required to repay the funds to the trustee for more equitable distribution. Usually this deals with an insider getting better treatment. The trustee may avoid certain liens on the property (such as unperfected liens) and fraudulent transfers.

Distribution of Property 4459

• Priorities in Property Distribution:

• Secured creditors have priority over unsecured creditors to the proceeds from the disposition of secured collateral. To the extent that a secured creditor’s claims are not satisfied by the secured collateral, he or she becomes an unsecured creditor for the balance due.

• Among unsecured creditors, proceeds from the remainder of the estate are distributed according to a strict categorization of claims, as set forth on page 152 of your text. In general, administrative costs are paid, unpaid wages within 90 days up to $4650 per claimant, employee benefit plans, consumer deposits up to $2100, alimony, taxes, and then general creditors.

• Note that general creditors, typically the largest class of unsecured creditors, are the last to receive any distributions from the bankruptcy estate.

DISCHARGE 4461

• Discharge: From the debtor’s perspective, the purpose of liquidation is to discharge his or her debts and start anew. However, as listed and discussed on pages 153 there are a number of non-dischargeable debts, including back taxes within 3 years of bankruptcy, borrowings to pay for federal taxes, alimony and child support, student loans, and consumer credit obtained within 60 days of filing.

BANKRUPTCY: REORGANIZATION (Ch 11) 4466

• Reorganization: A form of bankruptcy, under Chapter 11 of the Bankruptcy Code, whereby a business debtor and its creditors formulate a plan under which the debtor repays a portion of its debts and is discharged from the remainder.

• Debtor-in-Possession: Upon order of the bankruptcy court, the Chapter 11 debtor continues to operate his or her business as a debtor-in-possession, with or without the requirement that a trustee oversee the DIP.

Unsecured Creditors usually form a Creditors Committee which consults with the bankruptcy trustee.

• Reorganization Plan: A plan to conserve and administer the debtor’s assets in the hope of an eventual return to successful operation, which must:

(1) Designate classes of claims and interests;

(2) Specify the treatment to be afforded to each class; and

(3) Provide an adequate means for execution.

• Confirmation: Once a plan is developed, the various creditor classes must accept it, and the bankruptcy court must confirm the plan (i.e., make it binding).

BANKRUPTCY: REPAYMENT (Ch 13) 4467

• Repayment Plan: Individuals with regular income who owe fixed unsecured debts of less than $269,250 or fixed secured debts of less than $807,500 may voluntarily petition the bankruptcy court for relief under Chapter 13.

• Confirmation: Once the individual debtor has filed his or her plan, the bankruptcy court holds a hearing and will confirm the plan with respect to each claim of a secured creditor if:

(1) the secured creditor has accepted the plan;

(2) the plan provides that creditors retain their claims and the property to be distributed under the plan is sufficient to satisfy the secured claims; or

(3) the debtor surrenders the property securing the claim to his or her creditors.

• Discharge: After the completion of all payments, the bankruptcy court will discharge all debts provided for by the repayment plan. Even if the debtor does not completely satisfy the requirements of the plan, the court may grant a hardship discharge.

NOTE: Realize this is a simple overview of the bankruptcy process. Read the Text, and also remember these laws are probably gong to be changing to make it more difficult, particularly for persons with credit card debt, to go into Chapter 7.