Chapter Review

Secured Transactions

1. Creating a security interest—To create an enforceable security interest:
   1. The creditor must possess the collateral, or there must be a written security agreement signed by the debtor and reasonably identifying the collateral.
   2. The secured party must give value to the debtor.
   3. The debtor must have rights in the collateral.
2. Perfecting a security interest—The most common method of perfection is by filing a financing statement that contains the names and addresses of the secured party and the debtor, describes the collateral, and is signed by the debtor. A few types of security interests can be perfected without filing, including the purchase- money security interest in consumer goods, which is automatically perfected at the time of creation.

1. Priority—When more than one creditor claims rights in the same collateral, the first security interest to be perfected has priority. If only one of the conflicting security interests has been perfected, it has priority. When both security interests are perfected, the interest that was first to perfect generally has priority. A secured creditor does not prevail against a buyer in the ordinary course of business.
2. Remedies—On the debtor’s default, a secured party can repossess the collateral and retain it in part or full satisfaction of the debt, or can sell or dispose of the collateral in any commercially reasonable manner. Alternatively, the secured party can choose any judicial remedy available, such as obtaining a judgment against the debtor.

Liens

1. Mechanic’s lien—A nonpossessory, filed lien on an owner’s real estate for labor, services, or materials furnished for making improvements on the realty.
2. Artisan’s lien—A possessory lien on an owner’s personal property for labor performed or value added.
3. Judicial liens—
   1. Writ of attachment—A court order to seize a debtor’s nonexempt property prior to a court’s final determination of the creditor’s rights to the property. The creditor must comply with applicable state statutes.
   2. Writ of execution—A court order directing the sheriff to seize (levy) and sell a debtor’s nonexempt real or personal property to satisfy a court’s judgment in the creditor’s favor.

Garnishment

A collection remedy that allows a creditor to attach a debtor’s funds (such as wages owed or bank accounts) and property that are held by a third person.

Creditors’ Composition Agreements

A contract between a debtor and his or her creditors by which the debtor’s debts are discharged by payment of a sum less than the amount actually owed.

Suretyship and Guaranty

Under contract, a third person agrees to be primarily or secondarily liable for the debt owed by the principal debtor. A creditor can turn to this third person for satisfaction of the debt.

The Bankruptcy Code

1. Goals of bankruptcy law—The law attempts to balance the rights of the debtor and the creditors by giving the debtor a fresh start and ensuring equitable treatment of creditors.
2. Bankruptcy courts—Bankruptcy proceedings are held in federal bankruptcy courts (under the authority of U.S. district courts). They follow the Federal Rules of Bankruptcy Procedure. Bankruptcy court judges are appointed for fourteen-year terms.
3. Types of bankruptcy relief—Chapter 7 provides for liquidation proceedings, Chapter 11 governs reorganizations, and Chapter 13 (for individuals) and Chapter 12 (for family farmers and family fishermen) provide for adjustment of debts of parties with regular income.
4. Special treatment of consumer-debtors—The Bankruptcy Code requires that all consumer-debtors receive written notice of the purpose, benefits, and costs of each chapter of bankruptcy, as well as information on the types of services available from credit counseling agencies.

Who Can Petition

Debtor (voluntary) or creditors (involuntary).

Debtor (voluntary) or creditors (involuntary).

Debtor (voluntary) only.

Who Can Be a Debtor

Any “person” (including partnerships and corporations) except railroads, insurance companies, banks, savings and loan institutions, investment companies licensed by the U.S. Small Business Administration, and credit unions. Farmers and charitable institutions cannot be involuntarily petitioned.

Any debtor eligible for Chapter 7 relief; railroads are also eligible.

Chapter 12—Any family farmer (one whose gross income is at least 50 percent farm dependent and whose debts are at least 50 percent farm related) or family fisherman (one whose gross income is at least 50 percent dependent on and whose debts are at least 80 percent related to commercial fishing) or any partnership or close corporation at least 50 percent owned by a family farmer or fisherman, when total debt does not exceed a specified amount.

Chapter 13—Any individual (not partnerships or corporations) with regular income who owes specified amounts of fixed (liquidated) unsecured debt or fixed secured debt.

Procedure Leading to Discharge

Nonexempt property is sold with proceeds to be distributed (in order) to priority groups. Dischargeable debts are terminated.

Plan is submitted. If it is approved and followed, debts are discharged.

Plan is submitted and must be approved if the value of the property to be distributed equals the amount of the claims or if the debtor turns over disposable income for a three-year or five-year period. If the plan is followed, debts are discharged.

Advantages

On liquidation and distribution, most debts are discharged, and the debtor has an opportunity for a fresh start.

Debtor continues in business. Creditors can either accept the plan, or it can be “crammed down” on them. The plan allows for the reorganization and liquidation of debts over the plan period.

Debtor continues in business or possession of assets. If the plan is approved, most debts are discharged after the specified period.