Debtor and Creditor Relations

Bankruptcy Law

• Ch. 7- Straight bankruptcy/liquidation (Biz and Consumers)

○ Trustee required (appointed by COURT)
○ Allowed a discharge once every 8 years
○ Means test: If (net monthly income)*60 < $10,950, MAY
FILE
 If > $10,950, MUST FILE Ch. 13
 If >$6,575 and < $10,950, MAY ONLY FILE IF net
income is <25% of unsecured debt
 If <$6,575, AUTOMATIC LIQUIDATION
○ Involuntary: 12+ creditors -> 3 must file
 $13,475 must be owed between the 3 (unsecured
debt)
 < 12 Creditors -> 1 Creditor may file if owed at least
$13,475
• Ch. 9- Municipality reorganizations
• Ch. 11- Reorganizations (mostly Biz, can be used by individuals)
○ May be INVOLUNTARILY PETITIONED into bankruptcy, if
owes more than $13,475
○ May operate as a debtor-in-possession
○ Trustee: NOT REQURIED (may be appointed, however)
○ Provision for full payment of administration expenses is
required
○ Any interested party may propose a plan after the first 120
days following the order for relief
• Ch. 13- Individual debt adjustment (Individuals only, Voluntary
only)
○ Trustee required
○ Able to retain ALL assets unless otherwise stated
○ Full repayment or % of full amount owed creditors are
options

Involuntary Petition Dismissal- Debtor may recover punitive,

compensatory, and court/attorney fee damages
Statutory Liens- Liens that are effective against the debtor’s property
before the bankruptcy petition was filed represent property that is not
part of the bankruptcy estate; therefore, the trustee may not avoid
these liens

Reaffirmation of Debt Agreement

• Commitment to pay a debt that can be discharged in bankruptcy
• Debtor must have received adequate notice on the effects of
signing the reaffirmation
• Must not be rescinded before Discharge (i.e. required to be
signed before discharge)

Homestead Exemption- protects seizure of home by unsecured

creditors
Debtor and Creditor Relations
• IRS may still collect past-due taxes

Garnishment- Right to collect future income stream of debtor

Preferential Transfers- Voidable by trustee

Benefits creditor
Antecedent debt
Ninety days or less prior to filing (1 year for insiders)

Threshold = $5,475
Insolvent
More than would have been received in bankruptcy distribution

Distribution Order
Secured Debts
Child support
Administrative expenses/attorney fees
Middlemen

Wages (limit of $10,750 per employee, includes vacation/sick pay)

Employee benefits (pensions, heath care, etc..)
Deposits

Taxes owed to IRS

Under the influence claims (DUI)
General creditors

Assignment for Benefit of Creditors- made by Debtor

• ABC’s affect all general creditors
• Creditor consent not required
• Liquidate all non-exempt assets via a trustee (assignee)

Composition Agreement
• Participation is optional
• Creditors agree to take early payment of debt in exchange for full
satisfaction

Surety Agreements
• Creditor must go after debtor before the guarantor
(uncompensated, secondary liability)
• Compensated Surety contract = Surety primarily liable
• Unless a creditor specifically preserves his rights, a release of a
co-surety releases the other co-sureties in the amount of the
released surety’s share
Surety Remedies:
Indemnification- (surety recovers from debtor after paying creditor)
Contribution- (surety recovers from co-sureties who underpaid their
share)
Debtor and Creditor Relations
Exoneration- (bring suit against solvent debtor who won’t pay)
Subrogation- (surety’s right to succeed to the rights of the creditor
once the surety
has satisfied the debtors obligation)

Fraud to induce surety to enter contract

• Debtor induces Surety = Surety still liable to Creditor (unless
Creditor aware of the fraud)
• Creditor induces Surety = voidable by Surety
Release of Surety
• Any release of collateral by the creditor before satisfaction of the
debtors obligation, releases the surety to the extent of the
collateral released
• Personal Defenses not available to Sureties