Question

1. What is required for an enforceable security interest? 2. What happens when two secured parties claim security interests in the same collateral? 3. What types of property are exempt from attachment or levy of execution? 4. Who can use Chapter 7? 5. What is the essential difference between bankruptcy under Chapter 7 and bankruptcy under Chapter 11?

Answer 1

1. In order for a security interest to be enforceable, there are 3 requirements

i. The value must be provided in exchange for the collateral

ii. The debtor must have rights in the collateral or the ability to convey rights in the collateral to a secured party

iii. And either the debtor must have "authenticated" a security agreement with a description of the collateral or the creditor must be in possession of the collateral.

When all three of these formalities are met, the security interest "attaches" to the collateral and becomes enforceable.

2. There is a general rule of priority among secured parties:  The first security interest to be filed or perfected has priority over other filed or perfected security interests.  If no interest has been perfected, the first interest to attach has priority.  (If a bank files a financing statement on March 1 and another bank files a statement covering the same collateral on April 1, for example, the first bank’s interest has priority, but if the first bank failed to perfect its interest, the second bank’s interest would have priority; if both failed to perfect, priority would belong to the first to attach—that is, the first to advance money under a security agreement.) A purchase-money security interest (PMSI) may prevail over a non-PMSI in after-acquired property, even if the non-PMSI was perfected first. Generally, if the collateral is inventory, a perfected PMSI prevails over a previously perfected non-PMSI, provided that the PMSI party perfects and gives the non-PMSI party written notice of his or her interest before the debtor takes possession of the newly acquired inventory.  If the collateral is other than inventory, a PMSI has priority over a previously perfected non-PMSI provided that the PMSI is perfected either before or within ten days after the debtor takes possession (no notice is required). (For instance, a retailer might secure one loan with present and after-acquired inventory and get a second purchase-money loan to acquire new inventory, but after a fire, have insufficient inventory to cover both debts.

3. There are some states which have its own laws, which exempt certain property from being subject to execution and levy.

Homestead Exemptions: when the judgment is for a specific lien, a laborer’s lien or a mechanics lien, some state laws do not allow Homestead Exemptions. It is also limited to its monetary value.

Personal Property Exemptions: there are certain particular items to which many states do not require a monetary limitation. These items include clothing, wedding rings, etc. Household appliances are also commonly exempt, within a certain allowance. Other types of jewelry, aside from the wedding ring, may be exempt up to a certain value as well. Some states exempt these things specifically, while others give a total dollar limit on all types of personal property. most states do not allow creditors to execute and levy on Social Security or veteran benefits, unemployment or workers compensation, unmatured life insurance policies or the dividend, and payments pursuant to stock bonuses, pensions, profit sharing, annuity or retirement accounts.

Filing a Complain of Exemption: If one receives a notice of execution or a levy is performed on a property that falls within an exemption, a claim of exemption may be filed with the court. After filing a claim of exemption, the court will schedule a hearing at which, the court will determine if the property is, in fact, exempt and if it cannot be taken by the judgment creditor. If the court finds that the property is exempt, the property will be returned to the individual.

4. Chapter 7 is known as the “liquidation bankruptcy’’ because it discharges most of the unsecured debt that includes credit card debt, medical bills, and personal loans. It’s the quickest, simplest and most common type of bankruptcy. In order to be eligible for using chapter 7, one must pass a “means test’’ to qualify for Chapter 7 filing. The means test examines financial records, including income, expenses, secured and unsecured debt. One must qualify under income limits that vary by state. There are also debt requirements.