chapter 13. credit: extension of a loan from one party to another creditor (lender): the lender in...

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.

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


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


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


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


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


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


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


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


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


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


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


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


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


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


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



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



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


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


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


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


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)


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


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


chapter 13. credit: extension of a loan from one party to another creditor (lender): the lender in...

Documents

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security collateral

jewelryintangible property

debtors real property

credit transaction13

unsecured credit

secured lender