Consumer Bankruptcy Outline

GENERAL INTRODUCTION

CHAPTER 1 INTRODUCTION TO BANKRUPTCY

1. Consensual & Judicial Liens

1. Introduction

1. General Stuff

• BK= Federal Law

• Chapter 7= Traditional, Straight Bankruptcy, Liquidation where debtor gives up nonexempt property which can be claimed by unsecured creditors, all put into the BK estate and distributed PRO RATA to unsecured creditors.

Debtor is discharged from PERSONAL LIABILITY on the debts

• Chapter 13= Reorganization, for wage earners, allowed to retain assets and make payments to creditors over the life of an approved plan

• Chapter 12= bk specially for family farmers

• Chapter 11= Complex and generally for corporate reorganization and restructure, but sometimes available for certain individuals.

• Chapter 9= for municipalities

• BK=narrow focus, the triggering of BK law fits on top of property and contract law & often overrides this law but does not wipe them out

• The goal of BK for the debtor is to receive a discharge of liabilities & this alters the relationship between the creditor/debtor but the debt still exists & the lien may exist on the debt

• The BK Code was written w/ Secured & UCC & State Law in mind and if there is a conflict, the BK code generally will pre-empt

• BK 2005 Amendments: were meant to make it harder to file and saw initial dramatic drop in the # of filed BKs but it is now back up.

1. Purpose of Bankruptcy Code

1. To provide an orderly resolution of claims against an insolvent debtor (to avoid a race to the courthouse by aggressive creditors)

2. To maximize the recovery for creditors

3. To discharge the debtor’s liability for the debt

• Debt still exists, but becomes nonrecourse debt-the lien securing the debt also flows through bankruptcy and is not discharged

• Bankruptcy discharge affects contract and tort rights, but not property rights

4. Consumer Protection-provides no-fault remedy

• BK Code DOES NOT ALTER PROPERTY RIGHTS

A lien is a property right & generally is not subject to being affected or changed by BK

Example: Debtor purchases commercial property which is secured by a mortgage lien. Debtor files in BK and gets discharge from personal liability and doesn’t owe the debt. BUT if debtor doesn’t pay the debt the creditor can still enforce the lien & foreclose.

• Consensual Liens (Security Interests), ones the debtor agrees to, authorizes the creation of the lien and the debtor gets something in return for the lien

Personal Property: security interest, gov. by Article 9 of UCC

Real Property: mortgage or deed of trust, gov. by state law on real prop.

• Non-Consensual Liens: (not security interest under BK code)

Judicial Liens: created by judgment after lawsuit (§101(36))

Statutory Liens: created automatically by statute (§101(53))

Some types of non-consensual liens are not favored by public policy (landlord liens) and so MAY not flow through BK.

• A secured claim is entitled to 100% payment as a matter of 1^st priority or it gets to flow through (don’t get both).

• Liens are of paramount importance in BK:

• The creditor whose debt is secured by a lien in the debtor’s property has absolute priority w/r/t that property over other creditors who have no lien or a lien w/ lower priority

• BK Law allows some liens that are valid outside BK to be invalidated in the BK proceedings, demoting that lien-holder to the unsecured creditor status.

2. Consensual Liens

1. Security Interests in Personal Property

1. Types of Security Devices

1. Security Interests

1. UCC: Art. 9 interest in personal property which secures payment or performance of an obligation (cars)

• Includes both consensual and nonconsensual liens, but limited to personal property

2. BC §101(51): Lien on real OR personal property, but limited to consensual liens

2. Chattel Mortgage

• Modeled on real property mortgage

• Not practical for creditor to retain possession of collateral

3. Conditional Sale

2. Creation of the Security Interest

An Art. 9 security interest is created when it “ATTACHES” and then the lien may be enforced against the debtor

3 Events Which = Attach

1. Value has been given

2. Debtor has Rights in the Collateral

3. Either

1. Debtor has authenticated a security agreement describing the collateral OR

2. Debtor has agreed to the security interest AND the collateral is in the POSSESSION of the secured party

3. Perfection and Priorities

“Perfection” of the security interest normally determines whether the security interest will be effective against 3^rd parties

Perfection:

1. A security interest is Perfected when it has attached (see above) AND all of the Applicable Requirements for perfection have been satisfied.

2. Applicable Requirements: refers to some action by the secured party that gives notice of the security interest such as:

1. POSSESSION of the collateral by the secured party, OR

2. FILING of either the security agreement OR a financing statement

3. An unperfected security interest may be avoided in BK or may be reduced to unsecured party and paid only with the left over $ after secured liens/perfected liens are paid.

Priority:

1. Priority is given to the first creditor who files a financing statement (first in time, first in rights for security interests perfected before filing of the bk petition)

2. ...

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