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Secured Transactions and Bankruptcy.ppt

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					Creditors’ Rights and Bankruptcy


            Chapter 16
        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.
   2005 Changes to Bankruptcy
• Bankruptcy Abuse Prevention and
  Consumer Protection Act of 2005 amended
  requirements for personal bankruptcies
  -must use federal homestead exemption if
  filing within 1215 days of moving to a new
  state (limited to $125,000)
  -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 16

				
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