CHAPTER 13Negotiable Instruments, Credit & BankruptcyI. Negotiable Instruments: Substitute for cash Pg. 339A. Definition: Written promises or orders to pay a certain amount of money. Covered by article 3 of UCCB. Function: Substitute of cash, faster, safer, efficient C. Common negotiable instruments: Checking AccountD. Four types of negotiable instrument – two categories1. Orders to pay – three party instrumentsa. drafts (type #1) Pg. 342i. definition: order to pay involving three parties. Drawer orders Drawee to pay money to payeeii. creationb. checks (type #2)i. definition: Draft by the bank and payable on demand ii. distinguished from draft: iii. cashier’s check: Bank is drawer and drawee, money to bank and designates who the payee will be, needs guaranteed payment with real estate or test driving a high-end car c. Associated Home and RV Sales, Inc. 2. Promises to pay Pg. 343-344a. notes (type #3)i. definition: Promise by a maker to pay a sum to a payee toreply money borrowedii. parties involved: Maker of promise and Payeeiii. collateral notes: Personal property backs up a loaniv. real estate mortgage note: Real estate to secure a laonv. installment note: Repay a note in specified installmentsvi. balloon note: Payments made with a large final paymentb. certificates of deposit (type #4): Acknowledgement by the bank that they have received the money and that it will be repaid in a specific period of time. Not usually a high return Pg. 345E. Negotiability Pg. 3401. six UCC requirements for negotiable instrumentsa. written: Not oralb. unconditional: Terms are easily determinedc. signed: Signed by makerd. payable on demand or at a definite timee. to order or to bearer: Made to a specific person or barer of the instrumentf. certain sum of money2. ordinary holder: Same rights and responsibilities as the signer Pg. 3413. holder in due course (three UCC requirements): Gave value for the instrument, took the instrument without knowledge without it being defective, took it in good faithII. Credit Pg. 345A. Creditor and Debtor defined: Lends money to a debtor, the borrowerB. Credit Terms: When will it be paid, interest rate, amount of principal, dates of payment C. Credit Policy (5 characteristics) Capacity-ability to pay, collateral-assets, conditions-economic situation, capital-financial condition, character-reputation Pg. 346-347D. Credit Reports: Allowed to look at it every year1. Inaccuracy: Can sue if inaccurate2. Dun & Bradstreet3. Credit scores: Faster, 35% payment history, 30% outstanding debt, 15% length of time you have had credit, 10% # of inquires, 10% type of credit you have now E. Credit Accounts Pg. 3481. open account: Sold with an invoice, paid in full2. installment account: Used by a consumer to purchase goods, borrowed money with monthly payments3. revolving account: Minimum monthly payment F. Collections Policy Pg. 348-3491. Unsecured creditors: Hold on your promise to pay, must sue 2. Secured creditors: Take property to satisfy debta. real vs. personal propertyb. suretyship: Written contract, promise to be responsible for a borrowers obligations to a creditor. c. guarantors: Promises to payment of somebody else. Must pursue borrower first then guarantor d. Hill Roofing, Beal Bank, and Silverman4. Default by Debtor: Pg. 352a. default and priority: Debtor cannot meet payment obligation. Seller with secured interest has priority over unsecured creditors. Secured can reposes property without judicial process as long as they do not breech the peace. NC where the repossession took place, if there was fraud or trickery, creditor may keep it after or sellb. repossessionc. exemptions Pg. 354G. Mortgages1. Definition: Agreements to lend money giving a creditor the right to sell real property and repay the debt from sale proceed in the event of default.2. Parties: Debtor—Mortgagor Creditor—Mortgagee3. Requirements: In writing4. Recordation: Recorded in public place to protect rightsH. Liens Pg. 3551. legal meaning: Form of security obtained by a creditor through operation of law. Seller has legal right of the product2. common liens: Securement of services such repairsa. mechanic’s lien: Party has furnished material or labor or servicesfor construction for a real property. Materialment lien if not paidb. possessory lien: Artisans lien, hold on personal property on which work has been done or supplied. Agreed to do work on a cash basis, if not paid youcan sell the property to fulfill debt Pg. 357c. court-decreed liens i. attachment lien: Court orders a seizure of goods so they will not be disposed of during a lawsuitii. judgment lien: Creditor wins and has a judgment prepared and recorded. If the property is sold the lien is paidiii. writ of execution: Sheriff seizes and sells the property of the debtor to satisfy debts.d. Summers Group, Inc.III. Bankruptcy Pg. 357A. What is Bankruptcy? A person or business is unable to pay debt that is dueB. The Bankruptcy Code: 1. Chapter 7 Pg. 359a. Who uses Chapter 7? Goal of liquidation Individuals to gain a dischargeb. How is the proceeding initiated? Debt files a petition in court including a financial affair statementc. What happens when the petition is filed? Immediate freeze on actions against the debtord. What does the trustee do? Maximize the assets available to creditors. Meet with creditors to review info, keep them in line, distribute proceeds of the liquidation, supervise liquidationi. Exemptions: Debtors house up to value, furnishing in their car, and tools of the tradeii. Liquidation: Public auction and priority by creditorse. Priority among creditors: Pg. 361f. Dischargei. non dischargeable debt: Child support, back taxes, student loans, and government finesg. Life as a debtor – Darby: Cancelled his cable2. Chapter 11 Pg. 361-362a. Who uses Chapter 11? Businesses that want to remain in operation and not be liquidatedb. Going concern surplus: Value is a growing concern, exceeds what we would collect from selling assetsc. Reorganization Pg. 362-363i. debtor in possession: Operate for the benefit of the creditorsii. DIP’s duty of care: Act in the best interst of all creditors iii. Kmart3. Chapter 13 Pg. 359a. Who uses Chapter 13? Individuals and sole proprietors and higher income debtorsb. Confirmation plans: Individual comes up with a plan to play creditors between 3 and 5 years C. Nonbankruptcy Alternatives1. Composition: Agreement to repay percentage of total amount due2. Extension: More time3. Bank