MBA-538-MBOL1 - Research Paper - Creditors\' Rights and Bankruptcy - 06 PDF

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Running Head: Creditors’ Rights and Bankruptcy

Creditors’ Rights and Bankruptcy Heather Carter Saint Leo University MBA-538-MBOL1 Professor John Bermingham June 28, 2020

Student Signature: Heather Carter

2 Creditors’ Rights and Bankruptcy

Creditors are people or businesses to whom money is owed. They attempt to collect debts by mailing letters and making phone calls to persuade debtors to pay their debts. If creditors cannot locate debtors via mail or telephone, they will then attempt to find them using private investigators and/or computer software. There are legal rules that govern how creditors collect debts and issue judgements. According to the Fair Debt Collection Practices Act, creditors must identify who they are, who they are representing, and the address of their agency when calling debtors on the phone (Debt.org, 2012-2020). If that information is not provided in the beginning of the phone call, then the creditor must send a letter with-in five days of the initial call with the missing information. What happens when a debtor files bankruptcy? What legal rights or actions, if any, can creditors enforce during the bankruptcy process? Are there elements in common law torts or Uniform Commercial Code that allow creditors to continue action? What are the obligations, if any, for the debtors after filing bankruptcy? Do creditors have any leverage under different types of bankruptcy reliefs? Debt relief agencies along with several bankruptcy chapters offer plans for debt relief. There are several types of bankruptcy chapters and debt relief agencies that offer ways to relieve debt. Debt relief agencies charge a fee to negotiate with creditors on the debtor’s behalf. Debtors who use a debt relief agency will pay their debt through payments made to the agency for a specified amount of time. The difference between debt relief agencies and filing for bankruptcy is that there is no “extra” fee for filing bankruptcy like there is with a debt relief agency. In 2005, Congress passed a law called the Bankruptcy Abuse Prevention and Consumer Protection Act, Pub.L. No. 109-8 Stat.23 (2005) to protect debtors from agencies who do not have the debtor’s best interest in mind (American Board of Certification, 2016). Debt relief agencies are not

3 Creditors’ Rights and Bankruptcy

recommended by most government agencies to use for financial indebtedness. There are several bankruptcies chapters 7, 9, 11, 12, 13, and 15 who all offer relief for different areas of debt (Clarkson, Miller, & Cross, 2018). The most commonly used chapters are 7 and 13. Chapter 7 involves selling one’s assets to pay creditors. A “trustee” is assigned to evaluate one’s assets and place value for retribution. Some assets are considered exempt from the evaluation process like home equity. Federal exemption laws allow homeowners to have a certain amount in their home equity account so if a debtor does not have enough if that account that money is considered exempt and cannot be used to pay back creditors. If the debtor has any amount over what the federal exemption law states, then the overage can be used to pay back creditors. Also, if a debtor has property that is considered “secured” they cannot take it as long as the debtor agrees to pay the creditors. If a debtor does not have any assets of value to ration, then the case will be considered a “no asset case” and the property will not be sold. Basically, anything the debtor has that is of use to creditors will be used to pay debts owed by the debtor. Even though chapter 7 bankruptcy erases all debt giving the debtor a fresh start with credit the bankruptcy will stay on a credit report for ten years starting with the date the debtor files the paperwork. Chapter 13 also involves an assigned “trustee” who acts as a middleman between the debtor and the creditors. The payment plan is derived from earned income (employment) with low payments ranging from three to five years. Often, at times the debtor’s original amount owed is reduced lessening the burden of the debt. The debtor’s obligation in chapter 13 is to pay all debt owed for a fraction of the amount through garnishment of wages until it is paid in full. Once a debtor files for bankruptcy, creditors must stop all action of collections meaning they cannot call or send letters asking for payment. This is called a stay and it inhibits creditors from

4 Creditors’ Rights and Bankruptcy

contacting debtors. However, there are situations where creditors can request that the stay be lifted such as if an asset is not useful in a bankruptcy case. If creditors can prove the asset does not have enough equity to aid the bankruptcy or that the creditor will lose money during the bankruptcy process the stay will be lifted. Debtors can request a discharge of their bankruptcy through the judicial system. However, this is not easy and must be proven by a court of law. Under Bankruptcy Code Section 523(a)(6) it states that debts incurred under intentional or negligent torts will not be discharged. Intentional tort is where one person’s act(s) causes harm to another but did not set out to cause harm (Clarkson et al.). For example, if a person pushes another person down a water slide unexpectedly, and the person who was pushed is injured then this is an intentional tort. A negligent tort is where one person fails to follow rules or guidelines resulting in injury to another person. For example, surgery is performed on a patient and the surgeon amputates the wrong leg and now the patient still needs the other leg removed and is now a paraplegic. This is a negligent tort because the surgeon committed a wrongful act (not verifying the correct body part) which inflicted harm on the patient. There are some debts that a court will discharge such as student loans, credit cards, medical bills, and unpaid rent but the rest are difficult to prove for cause of discharge. When and if bankruptcy is declared there is an order of how the creditors will be paid and who will be paid first. Secured creditors are paid first and next in line are the unsecured creditors. Secured debts are backed by some form of collateral such as house, car, business, etc. that can be taken upon default. Sometimes things such as liens are imposed, usually by the

5 Creditors’ Rights and Bankruptcy

courts, which at that point a creditor can either negotiate with the debtor or take it and sell it to satisfy the debt. Being the first creditor to be paid is not without risk. If the secured creditor needs to leverage personal property or real estate, it must be done in writing. In dealing with real estate the creditor must register the deed to the property they are requesting. If it’s personal property, the creditors must file a financial statement with the office of the secretary of state. The uniform commercial code allows creditors to share information with other creditors concerning a debtor’s asset(s) that are being used for collateral by filing a financial statement with the office of the secretary of State (Texas Secretary of State, n.d.). Creditors file a UCC-1 as a “security interest” to publicly claim rights to a debtor’s assets and prevent other creditors from attaining the same assets. This “security interest” is created by the creditor executing a security agreement which details the collateral of claim. This may include accounts (cash and non-cash), intangibles, and equipment. However, it has been noted that the less detail of items the better and that for the security agreement to pass the words all assets of the debtor will suffice (Black, 2019). This is the only purpose the UCC serves for creditors and they have the right to use this system. Creditors have the right to call and send letters for collection of debts. For example, the Fair Debt Collection Practices Act governs how, when, and where debtors may be contacted and forbids fraudulent practices. Creditors can contest bankruptcy requests through the court system after the bankruptcy is filed and up to the day it is granted. However, this window of filing for creditors may be shortened due to different laws throughout the states so time of action is crucial for creditors in this situation. Filing the UCC-1 with the uniform commercial code in simple detail will ensure security interest for that creditor. Debtors have several options for filing

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bankruptcy, but the common ones used are chapter 7 and 13. Debtors who file chapter 7 will most likely face creditors pushing back and filing opposition to discharge certain debts. If there are debts in the case of a chapter 7 that involve intentional or negligent torts, then they will not be discharged and handled differently. Debtors who file chapter 13 pay their debts through monthly payments. In conclusion, creditors have an obligation to collect on debts incurred by people. They must attempt to collect on those debts through some form of communication. Creditors availability to collect ceases once a debtor files bankruptcy and resumes once bankruptcy is granted but only to collect final asset distributions.

7 Creditors’ Rights and Bankruptcy

References Debt.org. (2012-2020, n.d.) What is debt collection? Clay Run LLC. Retrieved from https://www.debt.org/credit/collection-agencies/debt-collectors/. American Board of Certification. (2016, May 23). What is a “Debt Relief Agency” and why does it matter? The American Board of Certification. Retrieved from https://www.abcworld.org/articles/what-%E2%80%9Cdebt-relief-agency%E2%80%9Dand-why-does-it-matter. Clarkson, Miller, and Cross. Business Law. 14th edition (2018). Cengage Custom. Texas Secretary of State. (n.d.). About the Uniform Commercial Code. The Texas Secretary of State. Retrieved from https://www.sos.state.tx.us/ucc/. Black, M. (2019, December 5). What is a UCC filing & how to remove a UCC filing. Nav. Retrieved from https://www.nav.com/blog/how-to-remove-a-ucc-filing-33235/....