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Law 322 Chapters 12 and 13

by: Stephanie Notetaker

Law 322 Chapters 12 and 13 LAW 3220

Marketplace > Clemson University > Law and Legal Studies > LAW 3220 > Law 322 Chapters 12 and 13
Stephanie Notetaker
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These notes cover material on the final exam.
Legal Environment of Business
Edward R. Claggett
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This 13 page Class Notes was uploaded by Stephanie Notetaker on Thursday March 31, 2016. The Class Notes belongs to LAW 3220 at Clemson University taught by Edward R. Claggett in Fall 2015. Since its upload, it has received 80 views. For similar materials see Legal Environment of Business in Law and Legal Studies at Clemson University.

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Date Created: 03/31/16
Law  322   Chapter  12  Notes   1. Three  stages  of  creating  a  business   a. Creation/set-­‐up  stage:  How  hard  or  easy  it  is  to  create  this  entity,     b. Operating  stage:  up  and  running,  does  the  entity  meet  the  needs   c. Exit  stage:    if  the  business  makes  a  lot  of  money  and  you  want  to   retire,  how  hard/easy  is  it  for  you  to  get  out  of  the  business   2. Sole  Proprietorship   a. Someone  deciding  to  start  up  their  business,  quickest  and  easiest  to   start  a  business,  typically  don’t  have  to  register  usually  or  have  a   license   i. You  start  conducting  business,  almost  anyone  can  do  it   ii. Disadvantages:  if  you  need  operating  capital,  the  cash  to  run   your  business,  you  have  a  limited  ability  to  raise  capital   1. To  ways  to  raise  capital:   a. Debt  financing-­‐borrowing  money   b. Equity  financing-­‐you  sell  shares  and  other   people  own  a  piece  of  your  business   iii. Personally  liable  for  the  business   iv. If  your  business  makes/loses  money,  it  goes  on  your  tax  return   3. Partnership   a. Associating  of  two  or  more  people/businesses  that  come  together  as   co-­‐owners  to  run  a  business  for  profit   b. Uniform  Partnership  Act  (federal)-­‐tells  you  how  to  make  a   partnership   i. Name,  purpose  of  partnership   ii. Who  the  partners  are   iii. What  capital  they  have  contributed  to  the  partnership   iv. Partners  are  assumed  to  share  profits/loss  equally  and  have   equal  voting  rights   c. Partners  put  their  share  on  their  tax  returns   d. Partners  are  personally  liable  for  the  debts  of  the  business-­‐unlimited   liability,  personal  assets  are  at  risk   e. The  more  partners  you  have,  the  more  potential  you  have  to  raise   capital  and  borrow  money   4. Limited  Partnership   a. Uniform  Limited  Partnership  Act-­‐federal  act   i. Limited  partnership  agreement   ii. Must  have  at  least  one  general  partner  and  one  limited  partner   1. General-­‐personally  liable  for  the  debts  of  the   partnership,  unlimited  liability,  not  good   a. Has  the  right  to  run  the  day  to  day  business   2. Limited-­‐limited  liability,  all  they  can  lose  is  the   partnership  capital  they  put  in   a. Not  personally  liable  for  the  debts   b. They  do  not  participate  in  the  day  to  day   management  of  the  business   3. If  the  general  partner  dies,  withdrawals  or  goes   bankrupt,  the  partnership  terminates   4. If  there  is  one  general  partner  and  5  limited  partners,   partnership  can  continue  if  one  limited  partner  dies,  as   long  as  there  are  still  two  partners   5. Corporation   a. Most  Fortune  500  companies   b. Created  under  State  law   c. File  articles  of  incorporation  with  the  secretary  of  state   i. Name  of  business   ii. What  the  business  is   iii. Who  the  owners/shareholders  are   iv. What  kinds  of  stock  you  plant  to  issue   v. Secretary  of  state  will  look  at  these  and  make  sure  nobody  is   using  the  same  business  name  and  issue  the  certificate  of   incorporation   d. Treated  as  a  separate  legal  entity,  which  means  if  it  borrows  money,   creditors  can  only  sue  the  corporation  not  the  shareholders   (shareholders  have  limited  liability)   e. Disadvantage:  pays  a  separate  level  corporate  income  tax,  federal   level,  state  level  and  local  level  (double  taxation)   f. Three  groups  of  individuals   i. Owners  (shareholders)   1. People  who  buy  the  stock  and  put  equity  into  the   business   2. They  hope  the  company  is  going  to  pay  them  dividends   3. No  legal  obligation  to  repay  the  shareholders   ii. Board  of  directors   1. Set  management  goals  and  targets  of  the  business   iii. Managers     1. Run  the  business,  hiring/firing   g. Business  Judgment  rule   i. Directors  and  managers  can’t  be  sued  for  damages/losses   when  they  make  honest  mistakes  in  judgment   ii. If  the  loss  is  due  to  gross  negligence  or  fraud,  then  you  can  sue   h. Corporation  is  the  only  type  of  entity  that  can  have  a  perpetual   existence,  it  can  last  forever   i. Can  be  terminated  by:   i. Voluntary  dissolution   1. 50%  of  shareholders  vote  to  dissolve  the  business   ii. Involuntary  dissolution   1. When  the  creditors  put  the  company  into  a  chapter  7   bank  filing,  business  terminates  and  no  longer  has  a  life   6. Professional  Corporation   a. Corporation=separate  legal  entity,  owners  have  limited  liability     i. One  except:  piercing  the  corporate  vale   1. If  someone  sets  it  up  as  a  corporation  and  doesn’t   respect  it  as  a  corporation   2. Holding  the  shareholders  personally  liable  for  the   shareholders,  not  treating  it  as  a  separate  legal  entity   b. Developed  because  you  could  put  more  retirement  benefits  into   corporations  to  maximize  profits   c. Subject  to  double  taxation   i. Not  as  big  of  a  deal  because  they  are  the  doctors  and  lawyers   ii. Easier  than  with  a  larger  corporation   d. All  50  states  allow  for  professional  corporations   7. Limited  Liability  Corporation  (Company)   a. Formed  under  Limited  Liability  Act   i. It  is  a  company,  you  get  limited  liability   ii. If  you  set  it  up  and  operate  correctly,  it’s  income  only  gets   taxed  to  its  owners,  doesn’t  pay  a  separate  corporate  level   income  tax   iii. Typically  small  to  medium  size  businesses  (not  Fortune  500)   iv. Not  allowed  to  have  a  perpetual  existence   v. If  a  member/owner  dies,  goes  bankrupt  or  withdrawals,  the   LLC  seizes  to  exist  unless  all  of  the  remaining  members  vote  to   keep  it  going   1. When  it  terminates  unexpectedly,  it  is  very  costly   vi. Can  be  used  for  a  limited  life,  you  can  specify  that  the  business   will  terminate  after  a  specific  event   8. Sub  Chapter  S.  Corporation   a. Limited  liability  for  its  owners   b. Does  not  pay  a  separate  corporate  level  income  tax   c. Goes  on  shareholders  taxes   d. Family-­‐run  businesses  usually   i. They  can  control  who  their  shareholders  are   e. Cannot  have  more  than  100  shareholders   i. Everyone  must  be  a  U.S  individual,  resident,  or  citizen   ii. Business  terminates  if  over  100  or  not  U.S  individual   9. Joint  Venture   a. Not  a  separate  legal  entity,  where  two  or  more  people  come  together   to  accomplish  one  specific  project,  typically  there  is  a  joint  agreement   (contract)  to  accomplish  project,  when  the  project  is  done,  the  joint   venture  is  terminated   i. Examples:  research  projects   10.Cooperative   a. Designed  to  pool  purchasing  power,  sells  membership  interest   b. Cooperative  goes  to  manufacturers  and  try’s  to  buy  large  sums  of   products  to  go  back  and  sell     c. Food  and  produce   d. Contractual  arrangement,  entitles  you  to  certain  purchasing   e. Goes  on  and  on  until  it  says  it  terminates   11.Syndicate   a. Designed  to  finance  a  specific  project,  not  a  separate  legal  entity,   typically  an  agreement   b. Way  to  conduct  a  type  of  business,  used  in  businesses  a  lot   c. Example:  Office  building   d. When  the  financing  is  raised,  the  project  is  done,  the  syndicate  is   terminated   12.Franchising-­‐typically  state  laws  deal  with  franchising   a. Franchisor=parent  company   i. Burger  King,  Wendys,  etc.   ii. Want  to  own  businesses  in  large  populated  cities     b. Franchisee=person  running  the  company   c. Perspective-­‐  to  help  make  decision,  controlled  by  state  law   i. Has  to  provide  certain  information   ii. Names,  address’  and  numbers  of  all  other  franchisees   iii. Financial  information  (don’t  want  them  to  be  in  financial   difficulty)   iv. Background  and  experience  of  key  executives  working  there   v. Number  of  franchisees  they  have  and  how  many  went  out  of   business   vi. Responsibilities  that  they  have  to  you  as  a  franchisee  and  what   responsibilities  you  have  to  them   d. They  must  give  you  a  copy  of  their  legal  franchising  agreement   (franchisor  to  franchisee)   i. Fees  you  have  to  pay  will  be  in  there  (typically  upfront  fee)   ii. Monthly  royalty  that  goes  to  franchisor   iii. Marketing  fee   iv. Territorial  rights,  no  one  else  can  open  that  same  company  in   that  zone   v. What  kind  of  assistance  you  will  get  from  franchisor   1. Financing  assistance   2. Mass  purchasing  power   3. Training   vi. What  can  terminate  the  agreement   1. Non-­‐payment  of  fees=immediate  cancellation   2. Entering  into  a  franchising  agreement  with  competitor   3. Drop  in  your  quality  or  service  depending  on  what  type   of  franchise  you  are   4. If  you  don’t  follow  their  guidelines  and  rules   13.Characteristics  of  types  of  businesses:   a. Liability   i. Do  the  owners  have  limited  liability  or  unlimited?   1. If  you  want  limited,  you  want  to  be  a  shareholder  or  a   limited  partner  in  a  limited  partnership   2. General  partner  or  sole  partner  then  you  have  unlimited   liability   b. Transferability  of  ownership   i. The  easiest  ownership  to  sell  or  transfer  are  shares  in  a   publicly  traded  organization   1. Easy  because:   a. You  know  what  the  fair  market  value  is  of  your   shares  at  any  point   b. If  you  want  to  sell  it  all  you  do  it  pick  up  the   phone  and  call  your  broker  (ready  purchasers)   ii. The  hardest  is  a  sole  proprietorship,  difficult  and  time   consuming   1. You  have  sit  down  and  negotiate  a  price  and  you  don’t   know  what  is  it  worth   iii. Must  read  partnership  agreements  before  trying  to  sell   because  it  is  common  to  not  be  able  to  sell  partnerships   without  consent  from  other  partners     c. Management   i. If  this  is  your  business,  how  important  is  it  to  you  that  you  can   run  the  day  to  day  business   1. If  it  is  important  than  you  want  to  be  a  sole  proprietor   or  you  want  to  be  a  general  partner  because  then  you   can  run  the  day  to  day  business   d. Continuity   i. Continuity  of  life   ii. When  you  set  it  up  what  do  you  foresee  for  it?   iii. Only  a  corporation  has  perpetual  existence   iv. All  other  entities  have  a  limited  life   e. Tax   i. Corporation  is  the  only  entity  that  has  double  level  of  tax   (federal,  state  and  local)   f. Capital   i. When  you  look  at  your  business,  how  much  money  do  you   need  to  get  it  started?   ii. Two  ways  to  raise:   1. Sell  shares  of  stock  if  you  are  a  corporation   2. Equity  financing     iii. Publicly  traded  company  can  raise  the  largest  amount  of   capital   iv. Hardest  to  raise  capital=sole  proprietorship   v. Partnerships=more  owners,  the  more  capital  you  can  raise       Law  322   Chapter  13  Notes   1. Negotiable  instruments   a. Negotiable-­‐something  that  can  be  transferred  of  value   i. Example:  A  check   b. Functions   i. Substitute  for  cash   ii. Method  for  merchants  to  expand  their  business   c. “Negotiability”   d. Requirements   i. Article  three  under  Uniform  of  Commercial  Code  says  it   must  meet  these  conditions  to  qualify  as  a  negotiable   instrument:   1. Must  be  a  written  instrument   2. Must  be  an  unconditional  order  or  promise  to  pay   somebody   3. Has  to  be  signed  by  the  maker  or  the  drawer   a. Cash  can’t  be  cashed  without  signature   4. Must  be  paid  on  demand  or  at  a  specified  time   a. Payable  on  demand-­‐  takes  check  to  bank  and   must  be  given  the  cash  right  away   5. Must  be  made  to  the  “order  of”  or  the  “bearer”   a. To  the  bearer,-­‐that  means  whoever  has   possession  of  that  instrument  can  get  the  value   of  it   i. Very  risky,  someone  finds  it  on  the  street   can  pick  it  up  and  cash  it   6. Has  to  state  a  fixed  amount  of  money  to  be  paid   7. If  all  these  requirements  are  met,  it  qualifies  as  a   negotiable  instrument   8. Types  of  holders  under  article  three   a. Ordinary  holder   i. If  there  are  any  defenses  against  that   check  to  be  paid,  then  you  might  not  be   able  to  cash  it  and  get  the  money   b. Holder  in  due  course   i. Guaranteed  they  are  going  to  get  paid   ii. Rather  be  this  than  an  ordinary  holder   iii. Must  give  value  to  the  instrument   iv. Have  to  take  the  instrument  not  knowing   its  fraud  or  bad   v. Must  take  instrument  in  good  faith,   innocent   e. Types-­‐   i. Orders  to  Pay  (three  party  instruments)   a. Drawer-­‐person  who  creates  the  instrument   (person  who  writes  the  check)   b. Drawee-­‐  entity  that  is  going  to  make  the   payment  (check  to  bank,  the  bank  is  the  drawee_   c. Payee-­‐  person  who  is  going  to  benefit,  you  are   paying  (“Pay  to  the  order  of”)   2. Checks   a. Limited  type  of  draft,  has  two  limits  that  general   drafts  don’t  have   b. Can  only  be  paid  currently,  can’t  be  paid  in  the   future   c. Drawee  can  only  be  a  bank  or  financial   institution   d. A  check  IS  a  draft,  but  has  restrictions  on  it   e. Some  merchants  prefer  a  credit  card  over  a   check  so  that  they  are  guaranteed  payment   3. Drafts   a. Legally  binding  order  to  pay  an  amount  of   money,  involves  three  parties,  drawee  can  be   about  any  entity  that  has  the  ability  to  pay   b. Three  parties,  draft  can  be  paid  now  or  in  the   future   c. Specific  types  in  business:  Site  draft     i. Requires  immediate  payment,  preferred   in  business  sometimes  because  you  know   you  can  get  paid  right  away   ii. Cashier  Check-­‐way  to  ensure  you  are   going  to  get  paid,  the  bank  is  the  drawer   and  the  drawee   iii. International  business-­‐Bill  of  exchange,   draft  that  guarantees  payment  for  goods   in  international  trade   ii. Promises  to  pay  (two  party  instruments)   1. A  promissory  note-­‐promise  from  one  person  o  pay   back  another  person   a. Person  who  lends  the  money-­‐creditors   b. Debtor-­‐owes  money   c. Promise  to  pay  you  back  at  a  certain  time  with  a   certain  amount  on  interest   d. Collateral  note-­‐debtor’s  assets  that  might  be  put   up  as  security  for  their  promise  to  pay   e. **Note  you  get  from  the  bank  when  you  buy  your   house  (what  is  this  called?)   f. Installment  note-­‐when  you  buy  a  car,  make  fixed   payments  periodically  until  price  is  paid  off   g. Balloon  note-­‐  a  large  portion  of  the  principal  isn’t   paid  until  the  maturity  of  the  note   2. Certificates  of  Deposit   a. Typically  issued  by  a  bank   b. Banks  promise  to  repay  your  principal  plus  your   specified  interest  in  a  specific  amount  of  time   c. Most  large  certificates  are  very  liquid,  can  cash   them  in  at  any  time  if  you  need  money   2. Credit   a. Creditor-­‐lends  the  money   b. Debtor-­‐owes  the  money   c. Two  ways  to  finance  a  business:   i. Can  go  to  the  bank  and  borrow  money  (debt  financing)   ii. Issue  shares  of  stock  in  your  company  (equity  financing)   1. People  buy  stock  because  they  hope  the  value  goes  up   and  they  hope  you  pay  them  dividends  during  it   d. Terms   i. If  merchants  want  to  use  credit:   1. Merchants  must  figure  out  their  credit  policy,  who  are   we  going  to  let  buy  from  credit   2. Merchants  look  at  credit  history,  can  do  a  credit  search   3. They  will  look  at  your  ability  to  pay,  do  you  have  other   assets,  do  you  have  a  car   4. Merchants  may  ask  you  to  pledge  assets  as  a  security   5. Secretary  of  state  keeps  all  financing  agreements  of  who   has  security  interest,  can  seize  assets  if  you  need  to   6. Options:  Get  a  security  interest  or  take  a  security   interest  in  other  assets  they  own   ii. Types  of  Credit  accounts:   1. Open  Account   a. Kind  you  see  between  merchants   b. “I’m  selling  to  Walmart,  they  have  30  days  to  pay,   I’m  continuing  to  sell  to  Walmart”   c. Very  common   2. Installment  Credit  Account   a. One  time  transaction   b. Buy  a  car  and  agree  to  pay  it  back  installment   payments   3. Revolving  Credit  Account   a. What  is  behind  a  credit  card   b. What  most  people  are  carrying  around   c. Most  cards  have  a  limit,  you  are  continuing   making  payments  and  buying   iii. Collection  policy   1. Merchants  have  to  decide  how  aggressive  you  have  to   be     a. Usually  send  out  a  letter  or  a  phone  call   reminding  they  are  late   b. Next,  you  might  pay  them  a  personal  visit   c. If  this  isn’t  working,  you  might  want  to  resort  to   a  collection  agency   d. They  hound  you  to  death  until  money  is  collected   e. The  history  and  volume  of  the  customer  is  what   the  merchants  look  at   i. If  you  are  a  small  customer,  you  might  be   more  aggressive   ii. Large  customers  want  to  keep  around   f. Most  U.S  businesses  do  sell  on  credit   e. Credit  Policy   f. Credit  with  security   i. When  a  new  business  is  starting,  banks  look  for  collateral,   somebody  to  co-­‐sign  your  note   ii. Surety   1. Under  article  three,  someone  that  co-­‐signs  a  note  and  is   primarily  reliable  for  the  note   iii. Guarantor   1. Only  secondarily  liable  for  the  debtors  obligations   2. Only  if  they  can’t  collect  from  the  debtor  then  they  come   after  the  guarantor   3. Better  position  than  a  surety   a. Both  are  creating  legal  exposure     iv. Defenses  of  sureties   1. If  the  subject  matter  of  the  agreement  was  illegal,  if  you   can  prove  that  it  was  fraud   2. Bankruptcy  is  NOT  a  defense   v. Surety’s  rights  against  principal   1. Exoneration   a. Where  the  surety  goes  to  the  court  and  says  the   lender  is  coming  to  me  to  insist  to  pay  and  I   know  the  borrower  has  the  money  to  pay  back   b. Court  order  to  the  debtor  to  repay  the  debt   2. Subrogation   a. If  you  make  the  payments  (surety),  you  have  the   write  to  sue  the  debtor  to  get  personal  assets   vi. Article  three  says  that  you  can  get  a  security  interest  in   inventory,  it’s  called  a  floating  lean,  get  by  filing  a  financial   statement   vii. If  the  debtor  defaults  (not  paying  as  promised),  if  you  are  a   secured  creditor  you  have  priority  over  unsecured  creditor,   article  three  says  if  you  are  a  secured  creditor  you  have  the   legal  right  to  repossess  that  asset  on  your  own  if  you  can  do  it   without  breaching  the  peace,  if  it  does  breach  the  peace  you   must  get  the  police  involved   viii. Attachment  lean-­‐court  order  that  says  to  the  person  who  has   the  asset  that  you  can’t  sell  that  asset   ix. Writ  of  execution-­‐  court  order  that  gives  the  police  the  right  to   go  out  and  get  _______   x. Exempt  property-­‐  you  can’t  seize  or  sell  it  as  part  of  a  secure   transaction   xi. Homestead  Exemption-­‐  a  modest  living  accommodation  cannot   be  taken  away  from  someone  to  pay  off  debts,  you  can’t  put   someone  on  the  streets,  also  a  car,  clothes,  or  tools  that  are   involved  with  your  job  can’t  be  taken  away   xii. Lien-­‐  someone  has  a  legal  claim  over  your  property   xiii. Mechanics  lean-­‐if  someone  does  work  on  your  real  property   and  you  don’t  pay  them  in  time   xiv. Possessory  lean-­‐on  personal  property,  if  someone  is  in   possession  of  your  personal  property  they  can  keep  it  until  you   pay  for  it,  if  you  drop  your  car  off,  or  laptop.  They  can  sell  it  in  a   certain  amount  of  time  if  not  paid   xv. Court  leans-­‐attachment  (freezes  assets)  judgment  lean-­‐says   you  win,  defendant  owes  you  a  certain  amount  of  money,  this   is  typically  followed  by  a  writ  of  execution,  garnishment  order-­‐ court  order  that  allows  you  to  get  up  to  25%  of  a  persons  net   pay  until  the  full  amount  has  been  repayed   g. Secured  Transactions   3. Bankruptcy-­‐federal  laws   a. Changes  to  bankruptcy  law  in  2005   i. Before  an  individual  can  file  for  bankruptcy  they  have  to  take   credit  counseling  (looks  at  the  past)   1. Do  you  need  to  file  for  bankruptcy?   2. What  type  of  bankruptcy?   ii. Debtor  education  course   1. Designed  to  help  the  individual  budget  for  the  future   iii. If  you  go  through  a  type  of  bankruptcy  where  the  debts  are   legally  discharged,  you  can  only  do  this  type  of  bankruptcy   every  8  years   b. If  you  do  need  to  file  for  bankruptcy,  the  first  choice  you  have  is   chapter  13  bankruptcy     i. Only  available  for  individuals  not  businesses   ii. File  a  plan  with  bankruptcy  court     iii. An  individual  can  have  up  to  a  5  year  extension  to  pay  back   their  debt  and  get  current   iv. Creditor  status  if  frozen  as  soon  as  you  file  for  any  type  of   bankruptcy  plan   v. No  debts  are  discharged  under  chapter  13   vi. If  this  is  filed  and  you  find  out  during  the  process  that  it  is  not   working,  you  can  convert  to  chapter  7  bankruptcy     c. Chapter  7  (liquidation)   i. If  you  say  more  time  isn’t  going  to  help,  you  would  file  to   chapter  7  proceeding,  it  is  available  to  both  individuals  and   businesses   ii. Business  is  done,  out  of  business,  all  assets  sold  off   iii. Individuals  start  life  fresh  but  you  don’t  have  a  lot  of  assets   iv. Debtors  assets  except  exempt  assets  (definition  above)  are   taken  and  sold  by  trustee   v. Trustee  generates  as  much  cash  as  they  can   vi. Can  be  two  types   1. Voluntary  Filing   a. Individual/  business  files  with  bankruptcy  court   b. Must  give  a  full  honest  disclosure  of  financial   position,  all  assets,  all  liabilities,  all  operating   income   c. They  can  deny  you  if  they  don’t  think  you  are   telling  the  truth   2. Involuntary  Filing   a. Creditors  are  fed  up  and  they  go  to  the  courts   and  initiate  the  proceeding   d. Chapter  13  (reorganization  of  debts)-­‐above   i. Need  more  time  as  an  individual   ii. If  you  start  at  chapter  11  or  13  and  it  isn’t  working,  you  can   convert  to  chapter  7  at  any  point  whether  individual  or   business   e. Chapter  11  (business  reorganization)   i. Counterpart  to  Chapter  13   ii. Businesses  file  for  this  when  it  is  thinks  it  is  not  hopelessly  in   debt,  just  needs  time  to  get  current   iii. Business  will  file  plan  and  a  proposal  showing  about  how  much   time  they  need,  there  is  no  cap  on  time   iv. Reasonable  extension  defined  by  bankruptcy  judge   v. Protected,  creditor  status  is  frozen,  can’t  sue   vi. Purpose  is  that  the  business  continues  to  operate   vii. At  the  end,  the  hope  is  that  the  business  is  still  in  business  and   it  is  profitable  and  continues  on  its  way   viii. Business  can’t  make  any  big  expenditures  without  approval   ix. Can  be  problematic   1. As  soon  as  you  file  for  bankruptcy,  the  trustee’s  job  is  to   maximize  amount  going  to  creditor   2. Can  be  expensive   3. Legal  fees,  more  operating  expenses   f. Priority  classes  of  creditors   i. Trustee  liquidates  assets  and  passes  down  the  chain   ii. No  money  goes  to  the  below  creditor  until  the  above  creditor  is   fully  satisfied   iii. Creditors  can’t  really  say  much  against  the  trustee  and   bankruptcy  court   iv. Secured  creditors  must  be  taken  care  of  first   v. 1-­‐Secured  creditors   1. Security  interest   2. Preferred  class  to  get  cash  in  a  chapter  7  liquidation   vi. Person  who  owed  money  died   vii. Unpaid  wages   1. If  you  had  employees   viii. Claims  of  farmers  and  fisherman   ix. Refund  of  security  deposits   x. Alimony  and  child  support  payments   xi. Taxes   xii. 7-­‐General  unsecured  creditors  (very  seldom  get  much  of   anything)   1. You  said  “I’ll  pay  you  back,  don’t  worry”   2. You  don’t  want  to  be  an  unsecured  creditor   g. Discharge  in  bankruptcy   i. Comes  at  the  end  of  a  chapter  7   ii. That  debt  disappears   iii. Bankruptcy  person  starts  fresh  with  a  couple  exceptions:   1. There  are  certain  debts  that  are  not  legally  discharged   by  the  bankruptcy  court   a. Alimony  and  child  support   b. Taxes   c. Most  student  loans  unless  it  would  create  an   undue  hardship  if  they  are  not  discharged,  tough   burden  of  proof   d. If  you  borrow  money  shortly  before  you  file  for   bankruptcy   e. If  you  owed  these  before,  you  owe  them  after   2. Transfer  of  assets  within  90  days  of  filing  will  be  taken   back  and  reclaimed     a. Can’t  transfer  out  of  your  name  to  someone  else   to  protect  them,  they  are  void  and  considered   fraudulent     h. Non  Bankruptcy  alternatives   i. All  voluntary,  which  means  creditors  must  agree  for  them  to   work   ii. Less  costly,  no  trustee  fees,  quicker,  less  damaging  to   reputation   iii. Bankruptcy  filing  is  public  information,  part  of  credit  history   1. More  difficult  to  borrow  money  in  the  future   2. Can  damage  your  image  no  matter  what  chapter   iv. These  are  not  public   v. Types   1. Debt  extension   a. Debtor  gets  creditors  together  and  typically  asks   for  either  an  extended  period  of  time  to  pay  back   creditors  or  asks  them  to  take  what  he  has  now   (you  know  exactly  what  you’re  getting)   i. Creditors  must  evaluate  alternatives  and   risks   ii. In  a  bankruptcy  you  aren’t  exactly  sure   what  you  are  going  to  get  paid   2. Bank  workout   a. Voluntary     b. If  most  of  money  is  owed  to  banks  or  creditors   c. Asks  for  either  more  time  to  pay  back  debt  or  for   the  bank  to  owe  you  more  money   i. Banks  hate  to  write  off  loans   ii. They  typically  like  to  give  you  more  time   to  pay  it  off   3. Assignment   a. Voluntary  chapter  7   b. Debtor  says  to  creditors  if  you  agree,  ill  transfer   all  my  assets  to  a  fiduciary  and  will  sell  them  all   and  distribute  cash  to  creditors   c. Debts  discharged,  start  life  fresh   d. If  you  can’t  get  all  creditors  to  agree,  then  only   option  is  bankruptcy    


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