BANKRUPTCY LAWS Duncan Equipment Company
DEC sold a welding machine to Desert Fabricators for $200,000 to be paid in installments. DEC took a security interest in the welding machine but did not file a financing statement. Desert Fabricators defaulted after paying $100,000, and DEC filed suit. While the suit was pending, Desert Fabricators sold the welding machine to Dan Dealer for $10,000. Dan sold the welding machine to someone else for $150,000. DEC added Dan Dealer as a defendant in the lawsuit against Desert Fabricators. Desert
Fabricators then declared bankruptcy. DEC sought to have the various transfers set aside. The court refused to do so.
Should the transfers be set aside? Why or why not?
Important to review the Bankruptcy Code:
1. - - - Will DEC win its suit? Why or why not?
Background:
Individuals, corporations, and municipalities with staggering debt have the option of declaring bankruptcy. The Bankruptcy Code is an attempt to protect the rights of both the debtor and the creditor in a bankruptcy
situation. The law is designed to accomplish two goals:
• Provide relief to persons or companies with overwhelming debt (debtors).
• Provide a fair means of distributing a debtor's assets among creditors.
Automatic Stay and Secured Transactions
The moment any debtor files for bankruptcy protection, the debtor's creditors are prohibited from taking any action to collect on a debt or other obligation that existed prior to the bankruptcy filing. This debt-collection
prohibition is known as automatic stay (11 United States Code [USC] §365).
However, a creditor holding a secured interest in collateral that is part of a debtor's bankruptcy estate can petition the court to lift the automatic stay. If the debtor does not have an extensive amount of equity in
the collateral (fair market value in excess of the debt owing) and the collateral is not necessary to debtor's reorganization (Chapter 11 only), the court allows the secured creditor to repossess (foreclose) on its secured collateral.
The secured party can accept the collateral in full satisfaction of the debt or foreclose on it and use the proceeds to pay off the debt. If the collateral's value exceeds the debt, the proceeds cover reasonable fees and costs incurred because of the debtor's default. If the collateral's value is less than the debt, the secured creditor becomes an unsecured creditor for the difference.
Priority of Payments in Unsecured Debts
In case of unsecured debts, payments are made according to priority. Each class must be paid before the next class lower in priority. If proceeds are not sufficient to pay all creditors in a class, payment is proportional and classes of lower priority do not receive anything. If a debtor has no assets and unsecured creditors, most creditors whose debts are discharged receive nothing.
Certain debts, such as alimony, student loans, and debts obtained by fraud, are not discharged. The debtor has to pay them.
Forms of Bankruptcy Relief
Bankruptcy proceedings vary depending on the chapter under which bankruptcy is filed.
Look at the available forms of bankruptcy relief
Required: 2-3 paragraphs wiht detailed explanations
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