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Chapter 13
Credit: Extension of a loan from one party to another
Creditor (lender): The lender in a credit transaction Debtor (borrower): The borrower in a credit
transaction
13-2Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
13-3Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Unsecured credit: Credit that does not require any security (collateral) to protect the payment of the debt Collateral: Personal property that is subject to a security
agreement Secured credit: Credit that requires security
(collateral) that secures payment of the loan
13-4Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
13-5Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Mortgage is a two-party instrument Some states’ laws provide for the use of a deed of
trust and note in place of a mortgage Note: An instrument that evidences a borrower’s debt to the
lender Deed of trust: An instrument that gives a creditor a
security interest in the debtor’s real property that is pledged as collateral for a loan
13-6Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
A statute that requires: A mortgage or deed of trust to be recorded in the county
recorder’s office of the county in which the real property is located
An improperly recorded document is not effective against: Subsequent purchasers of the real property Other mortgagees or lienholders who have no notice of the
prior mortgages
13-7Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
A judgment of a court that permits a secured lender to recover other property or income from a defaulting debtor If the collateral is insufficient to repay the unpaid loan
Antideficiency statute: A statute that prohibits deficiency judgments regarding certain types of mortgages Such as those on residential property
13-8Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
13-9Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Mechanic’s lien: A contractor’s, laborer’s, and material person’s statutory lien It makes the real property to which services or materials
have been provided security for the payment of the services and materials
Personal property Tangible property such as equipment, vehicles, furniture,
and jewelry Intangible property such as securities, patents, trademarks,
and copyrights
13-10Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
An article of the Uniform Commercial Code that governs secured transactions in personal property Includes changes to provisions that have been controversial
in the past Contains new provisions that recognize changes in the
commercial environment Provides rules for the creation, filing, and enforcement of
electronic secured transactions
13-11Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
A written document signed by a debtor that creates a security interest in personal property
A valid agreement must Clearly describe the collateral so that it can be readily
identified Contain the debtor’s promise to repay the creditor,
including terms of repayment Set forth the creditor’s rights upon the debtor’s default Be signed by the debtor
13-12Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Attachment A creditor has an enforceable security interest against a
debtor and can satisfy the debt out of the designated collateral
Floating lien A security interest in property that was not in the
possession of the debtor when the security agreement was executed
13-13Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
A floating lien can attach to the following After-acquired property: Property that a debtor acquires
after a security agreement is executed Sale proceeds – The secured party automatically has the
right to receive sale proceeds of sale, exchange, or disposition of the collateral subject to an agreement
Future advances: Funds advanced to a debtor from a line of credit secured by collateral
13-14Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
A process that establishes the right of a secured creditor against other creditors who claim an interest in the collateral
Three methods Perfection by filing a financing statement Perfection by possession of collateral Perfection by a purchase money security interest in
consumer goods
13-15Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Financing statement: A document filed by a secured creditor with the appropriate government office It constructively notifies the world of his or her security
interest in personal property It must contain▪ The name of the debtor
▪ The name and address of the secured party or a representative of the secured party
▪ The collateral covered by the financing statement
UCC Financing Statement: A uniform financing statement form that is used in all states
13-16Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
A rule that says if a secured creditor has physical possession of the collateral, no financing statement has to be filed The creditor’s possession is sufficient to put other potential
creditors on notice of the creditor’s secured interest in the property
Perfection by a purchase money security interest in consumer goods The creditor automatically obtains interest when he or she
extends credit to a consumer to purchase consumer goods
13-17Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
The order in which conflicting claims of creditors in the same collateral are solved Secured vs. unsecured Competing unperfected security interests Perfected vs. unperfected claims Competing perfected security interests
13-18Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
A person who in good faith and without knowledge of another’s ownership or security interest in goods buys the goods in the ordinary course of business from a person in the business of selling goods of that kind
Default and remedies The parties are free to define “default” in their security
agreement Remedy – Repossession of the goods from the defaulting
debtor
13-19Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
In Revised Article 9 “record” means information that is Inscribed on a tangible medium Stored in an electronic or other medium Retrievable in perceivable form
Financing statements to perfect a security interest in personal property may be: In electronic form Filed and stored as an electronic record
13-20Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
13-21Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Type of Arrangement
Party Liability
Surety contract Surety Primarily liable. The surety is a co-debtor who is liable to pay the debt when it is due.
Guaranty contract Guarantor Secondarily liable. The guarantor is liable to pay the debt if the debtor defaults and the creditor has attempted unsuccessfully to collect the debt from the debtor.
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 A federal act that substantially amended federal bankruptcy
law This act makes it more difficult for debtors to file for
bankruptcy and have their unpaid debts discharged Bankruptcy Code: The name given to federal
bankruptcy law, as amended
13-22Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
13-23Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Chapter Type of Bankruptcy
Chapter 7 Liquidation
Chapter 11 Reorganization
Chapter 12 Adjustment of Debts of a Family Farmer or Fisherman withRegular Income
Chapter 13 Adjustment of Debts of an Individual with Regular Income
Special federal courts that hear and decide bankruptcy cases
Federal law establishes the office of the U.S. Trustee U.S. Trustee – A federal government official who has
responsibility for handling and supervising many of the administrative tasks associated with a bankruptcy case
13-24Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
13-25Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
The suspension of certain legal actions by creditors against a debtor or the debtor’s property Prevents creditors from▪ Instituting legal actions to collect prepetition debts
▪ Enforcing judgments obtained against the debtor
▪ Obtaining or enforcing liens against property of the debtor
▪ Engaging in self-help activities
13-26Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
A debtor’s property and earnings that comprise the estate of a bankruptcy proceeding Exempt property: Property that may be retained by a
debtor pursuant to federal or state law that does not become part of the bankruptcy estate
The 2005 act Limits abusive homestead exemptions Gives the bankruptcy court the power to void certain
fraudulent transfers of the debtor’s property by the debtor
13-27Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
A form of bankruptcy The debtor’s nonexempt property is sold for cash, the cash
is distributed to the creditors, and any unpaid debts are discharged
Median income test: A bankruptcy rule which states If a debtor’s median family income is at or below the
state’s median family income for a family the same size as the debtor’s family, the debtor can receive Chapter 7 relief
13-28Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
A rehabilitation form of bankruptcy Permits bankruptcy courts to supervise the debtor’s plan for
the payment of unpaid debts in installments over the plan period
Chapter 13 plan of payment Plan must commit to payment of the debtor’s disposable
income during the plan period to pay prepetition creditors Chapter 13 discharge
Granted to the debtor after the debtor’s plan of payment is completed (which could be three years or up to five years)
13-29Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
A form of bankruptcy that allows the reorganization of the debtor’s financial affairs under the supervision of the bankruptcy court Plan of reorganization: Sets forth a proposed new capital
structure for a debtor to assume when it emerges from Chapter 11 reorganization bankruptcy
Automatic stay The filing of a Chapter 11 petition stays actions by creditors
to recover the debtor’s property
13-30Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
A contract or lease that has not been fully performed With the bankruptcy court’s approval, a debtor may reject
executory contracts and unexpired leases in bankruptcy Chapter 11 discharge
The bankruptcy court will confirm a plan of reorganization if the creditors agree to the plan
13-31Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
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