Chapter 17- Legal Assent

Legal Assent: a promise the courts will require the parties to obey
Voidable: (without legal assent) a circumstance that can cost a business large
profit when the transaction is significant
Rescinded: cancellation of a voidable contract (if cancelled, the person cancelling
the contract is entitled to the return of everything he/she gave to the other party)
Mistake of fact: an erroneous belief about the facts of the contract at the time the
contract is concluded
Unilateral mistake: the result of an error by one party about a material fact, that is,
a fact that is important in the context of the particular contract
Rescission (rare, in this case) is permitted when:
o One party made a mistake about a material fact, and the other party
knew or had reason to know about the mistake
o The mistake was caused by a clerical error that was accidental and did
not result from gross negligence
o The mistake was so serious that the contract is unconscionable, that
is, so unreasonable that it is outrageous

Mutual mistake: shared by both parties to the agreement.
Rescission is fair because any agreement was an illusion: Ambiguity
prevented a true meeting of the minds
For mutual mistakes to interfere with legal consent, ALL must be present:
o A basic assumption about the subject matter of the contract (a mistake
must be made about the existence, quality, or quantity of items being
exchanged)
o A material effect on the agreement (the mistake must effect the essence
of the agreement)
o An adverse effect on a party who did not agree to bear the risk of
mistake at the time of the agreement (if a person agrees to a contract
and then later changes their mind because the item exchanged didnt
meet their expectations or they didnt account for the risk)
Misrepresentation: the untruthful assertion by one of the parties about a material
fact; it prevents the parties from having the mental agreement necessary for a legal
contract.
Innocent misrepresentation: results from a false statement about a
material fact that the person making it believed to be true
o That person lacked scienter (knowledge)
Negligent misrepresentation: If a person could have known the truth by
using reasonable care to discover or reveal it, even though the person might
not have intended to deceive (should have known the truth)
Fraudulent misrepresentation: (aka intentional misrep.) the consciously
false representation of a material fact
o NECESSARY ELEMENTS:
A false statement about a past or existing fact that is
material to the contract
Intent to deceive, which can be inferred from particular
circumstances
Justifiable reliance on the false statement by an innocent
party to the agreement: generally present unless the injured
party knew, or should have known by the extravagance of the
claim, that the false statement was indeed false
False Assertion of Fact:
Concealment: the active hiding of the truth about a fact
Nondisclosure: the failure to provide pertinent information about the
projected contract
o Circumstances:
A relationship of trust exists between the parties to the
contract
There is a failure to correct assertions of fact that are no longer
true
A statute requires disclosure (i.e. residential real estate laws)
Nondisclosure involves a dangerous defect
Intent to Deceive
Scienter is present when the party making the fraudulent assertion believed
it was false or had no regard to whether it was true or false
Intent to Deceive occurs when the party making the false statement claims to
have or implies having personal knowledge of its accuracy
Justifiable Reliance on the False Assertion



Chapter 18- Contracts in Writing

Statute of Frauds: Required to be in writing, not oral.
Three main purposes-
1. Ease contractual negotiations by requiring sufficiently reliable evidence to
prove the existence and specific terms of a contract
2. Prevent unreliable oral evidence from interfering with contractual
relationship. By requiring that a contract be in writing, the statute precludes
the admittance of oral evidence denying the existence of a contract or
claiming additional terms that would substantially alter the contract from its
written form
3. Prevents parties from entering into a contract in which they do not agree.
(Prevents hasty, improperly considered contracts)

Contracts within the Statute of Frauds
They are:
1. Contracts whose terms prevent possible performance within one year
2. Promises made in consideration of marriage
3. Contracts for one party to pay debt of another if initial party fails to pay
4. Contracts related to an interest in land
5. (NOT required by Statute of Frauds, but IS required under UCC) Contracts for
the sale of goods totaling more than $500

1) A contract for lifetime employment does NOT need to be in writing because it
can possibly be completed within one year. (i.e. if the employee dies within
the first year of employment)
a. If the contract can possible be performed within a year, even if
highly unlikely, it does not need to be in writing
2) When one party promises something to the other as a part of an offer of
marriage, it must be in writing.
a. Mutual promises do NOT fall under Statute of Frauds.
b. Prenuptial Agreements DO have to be in writing; states ownership
rights of each party in the others property.
3) AKA Secondary obligations; secondary promises; collateral promises;
suretyship promises.
a. i.e. a guarantor on a car loan
b. Primary obligations (I promise to pay my neighbor in exchange for
their car) are not required in writing; Secondary obligations (my
mother agreeing to pay my debt if I fail to pay) is required in writing
4) Encompasses not only land and the soil itself, but anything attached to the
land.
a. Mortgages and leases are required in writing
5) Must state the quantity sold; buyer, seller, price and method of payment do
not need to be included.

Further requirements:
In some states:
Equal dignity rule: contracts that would normally fall under the statute
and need a writing if negotiated by the principal must be in writing even
if negotiated by an agent.

Sufficiency of the Writing
Circumstances in which the Statute of Frauds applies:
Marriage
Year (within one year)
Land
Executor (guarantor)
Goods (greater than $500)
Suretyship (Secondary obligations)
Requirements of a Writing Sufficient to Satisfy the Statute of Frauds under the
Common Law
Name of the parties to the contract
The subject matter of the agreement
The consideration given for the contract
All relevant contractual terms
The signature of at least the party against whom the action is brought

EXCEPTIONS to the Statute of Frauds
(1) Admissions, (2) partial performance, and (3) promissory estoppel.

(1) Admission
a. A statement made in court, under oath, or at some stage during legal
proceeding in which a party against whom chargers have been
brought admits that an oral contract existed, even thought that
contract was required in writing.
b. All states, except Louisiana and California, allow this exception.
c. Under the UCC, admission is an exception, but will only be enforceable
for the quantity admitted
(2) Partial Performance
a. When the buyer in the alleged contract has already paid any portion
of the price, has begun to permanently improve the land, or has taken
possession of it, the courts will consider the contract partially
performed and this partial performance and will amount to proof of
the contract
b. NO longer needs to be in writing if payment begins or delivery of
goods has begun. (oral contract is assumed)
(3) Promissory Estoppel
a. The legal enforcement of an otherwise unenforceable contract due to
a partys detrimental reliance on the contract.
b. Example: you accept an offer to sell your house and then enter a
contract to buy another house. The house you wish to by is more
expensive and so you decide to sell your rare collectibles to make up
for the difference. The person from whom you were planning to buy a
house decides to not sell it to you. Because the other person
reasonably should have known you were relying on the contract and
because you did so to your own detriment, under promissory estoppel
you could when performance of the sales contract.

Exceptions under the UCC:
Oral contracts between merchants: not required in writing
Oral contracts for customizable goods are required in writing, because these
goods are not likely to be salable to the general public.

Parol Evidence Rule: makes oral evidence of an agreement inadmissible if it is
made before or at the same time as a writing that the parties intend to be the
complete and final version of their agreement
Prevents contradictions between written and oral evidence
If the written evidence isnt fond to be the complete and final version, other
forms of evidence may be admissible
o Limited to elements missing from the written contract, but consistent
with it.
Does not usually exclude extrinsic written evidence
Merger Clause: when a parties signals to judges that the written contract is
intended to be a final and complete statement of their agreement.

****Once a final integrated agreement has been written, no oral evidence of any
prior or contemporaneous agreement can be admitted into court to change the
terms of the agreement.

EXCEPTIONS to the Parole Evidence Rule
(1) Contracts that have been subsequently modified, (2) contracts conditioned on
orally agreed-on terms, (3) contracts that are not final as they are part written and
part oral, (4) contracts with ambiguous terms, (5) incomplete contracts, (6)
contracts with obvious typographical errors, (7) voidable or void contracts, and (8)
evidence of prior dealings or usage of trade.

(1) Contracts that have been subsequently modified
a. Although parol evidence contradictory to the final terms is
inadmissible, evidence regarding a contracts subsequent modification
IS admissible.
i. Must have been made AFTER, and it must be CLEARLY stated
b. If the agreement is required in writing under the statute of frauds,
oral modifications are unenforceable
c. However, oral evidence of a subsequent written agreement is
admissible.
(2) Contracts conditioned on orally agreed-on terms
a. Condition precedent: when an entire contract is conditioned on
someone elses occurring first
i. Evidence proving the existence of this is admissible
ii. Parol Evidence Rule does not apply to condition precedent
(3) Non-finalized, partially written and partially oral contracts
a. It is assumed that the written portion is not intended to represent the
entire agreement. Therefore, oral evidence is admissible in order for
the contract to be complete.
(4) Contracts containing ambiguous terms
a. Presents a dilemma in interpretation
b. Court allows evidence even oral, in order to clarify, but not change or
modify the ambiguous terms
(5) Incomplete contracts
a. When this is the case, courts may allow parol evidence to fill in the
missing parts while not modifying
b. Parol evidence is used here to facilitate business transactions, not
force the parties into a new contract
(6) Contracts with obvious typographical arrors
a. Parol evidence is admissible in order to prove that there was a typo,
as well as to set forth the proper term
b. The correction does not alter the agreement because the typo is not
an accurate reflection of the parties agreement
(7) Void or voidable contracts
a. Parol evidence is used to demonstrate the conditions of the void or
voidable contract
b. Evidence of a defense against a contract is admissible to prove a
contract is void or voidable
(8) Evidence of prior dealings or usage of trade (UCC)
a. Falls under UCC, not Statute of Frauds
b. Parol evidence is admissible for the sole sake of proving prior dealings
of trade
c. By examining past dealings, courts expect both parties to interact in a
similar manner to they way the did in the past

Integrated Contracts
Written contracts intended to be the complete and final representation of the
parties agreement.
When deemed integrated, parol evidence is inadmissible. (with the exception
of the of the above exceptions)


CHAPTER 19- Third-Party Rights to Contracts

Assignments and Delegations
Obligers: contractual parties who agreed to do something for the other party
Obligees: contractual parties who agreed to receive something from the other party

Assignment: occurs when a party to a contract- an assignor- transfers her rights to
receive something under the contract to a third party- an assignee.
Assignments covered by the Statute of Frauds must be in writing
Rights that cannot be assigned:
o Rights that are personal in nature (unless it is rights to payment)
o Rights whose assignment would increase the obligors risk or duties
o Rights whose assignment is prohibited by contract
o Rights whose assignment is prohibited by law or public policy
Notice of assignment is not required, but if notice is given you can avoid two
complications:
o If notice isnt given, the obligor may still fulfill the contract AS
WRITTEN (to the oblige, not the assignee)
o If assigned to multiple parties and the obligor is not notified, there
may be confusion as to whom has the rights to the contract.
Most states use first-assignment-in-time rule, which gives
the rights to the first party assigned
Some use the English Rule, which states that the first assignee
to give notice to the obligor has rights to the contract

Delegation occurs when a party to a contract- a delegator- transfers her duty to
perform for a third party- a delegate- who is not part of the original contract
Duties that cannot be delegated
o Duties that are personal in nature
o Duties for which the delegatees performance will vary
significantly from the delegators
o Duties in contract that forbid delegation

Third-party beneficiary is created when two parties enter into a contract with the
purpose of benefiting the third party (called the intended beneficiary)
The beneficiary need not be named in the contract as long as the
terms of the contract or events occurring after its creation make it
clear who he or she is
Intended beneficiary: a third party to a contract whom the contracting parties
intended to benefit directly from their contract
In determining whether a third party is the intended beneficiary,
courts may ask the contracting parties whether they intended the
third party to be the direct, primary, or express beneficiary
Promisor: In a third party beneficiary, is the party who makes the promise that
benefits the third party
Promisee: the party who owes the promisor something in exchange for the promise
made to the third-party beneficiary

Credit beneficiary: A third party that benefits from a contract in which the
promisor agrees to pat the promisees debt
Alex agrees to pay Melissas debt to a credit card company.
Donee Beneficiaries: third parties who benefit from a contract in which a promisor
agrees to give a gift to the third party
Most common example: Life insurance policies and the beneficiaries
who receive payment after death
Vesting of Rights:
Vest: when a persons rights to a contract mature such that he/she can
legally act on them
Before the beneficiarys rights vest, the original contracting parties
may make any changes they want
One of three things must occur:
o If the beneficiary does not know about the contract, his or her
rights to the contract vest.
o When the beneficiary decides to accept, then his or her rights
to the contract vest.
Acceptance is assumed when the beneficiary becomes
aware of the contract and does not reject it
o Third, in order for their rights to the contract to vest, the
beneficiary must change his or her position based on a reliance
on the contractual rights
He must take some action that he would not have
otherwise taken because he is expecting benefits from
the contract

Creditor vs Donee Beneficiaries
Two main differences:
The reason the third-party beneficiary contract was created
o Creditor: if the main reason for the contract is to release a party from
an obligation to a third party
o Donee: if the sole purpose is to grant a gift to a third party
The time at which a beneficiary can enforce their rights
o Creditor: can enforce their rights whenever the contract is valid
May sue the promisor or promise for performance (ONLY
one of them)
If against a promise, the promise may sue the
promisor for breach of contract
o Donee: can enforce their rights to most contracts (some jurisdictions
dont allow beneficiaries to enforce their rights)
When they can enforce, it may only be against a promisor,
beause the promise has no duties to the donee beneficiary
Incidental Beneficiaries:
When the contracting parties unintentionally benefit a third party that wasnt
originally intended

Chapter 20- Discharge and Remedies

CONDITIONS
Conditional Contracts- contracts containing conditions affecting the performance
obligations of the parties

Discharge by Conditions Precedent, Subsequent, and Concurrent
Condition precedent: a particular event that must occur in order for a partys
duty to arise (if the event doesnt happen, the partys duty isnt required)
o Common examples: real estate contracts and insurance contracts
Condition subsequent: a future event that terminates the obligations of that
parties when it occurs
o Example: 5 year lease on an apartment on the condition that you pay
unless you get called to active duty for National Guard. If you get
called for active duty, you no are no longer bound by the contract.
Concurrent conditions: when each partys performance is conditioned on the
performance of one another.
o These only occur when the parties are required to perform for each
other simultaneously

Expressed and Implied Conditions
Express conditions: are explicitly stated in the contract and are usually
preceded by words such as conditioned on, if, provided that, or when.
Implied conditions: not explicitly stated, but inferred from the nature and
language of the contract
o Example: If you enter a contract with a construction company to
remodel your kitchen, there is an implied condition that the builder
will be given access to your home so that they may fulfill their
obligations

DISCHARGE BY PERFORMANCE
Types:
Complete performance: when all aspects of the parties under the contract
are carried out perfectly. (Difficult, and almost impossible)
Substantial performance: occurs when the following conditions have been
met:
Completion of nearly all the terms of the agreement
An honest effort to complete all the terms
No willful departure from the terms of agreement
o Generally, discharges the party from its obligations, but the judge may
require compensation for parts not completed

DISCHARGE BY MATERIAL BREACH
Material Breach: discharges the non-breaching party from his obligations
under contract
o Occurs when a party unjustifiably fails to substantially perform his
obligations
Anticipatory Repudiation: when a party decides not to complete their
obligations before the time of performance occurs (due to changes in market
and profitability)
o Once the contract is anticipatorily repudiated, the non-breaching
party is discharged and is free to sue for breach.

DISCHARGE BY MUTUAL AGREEMENT
Mutual Rescission: when both parties with to discharge each other from
their mutual obligations and therefore rescind/cancel the contract
Substituted contract: Instead of cancelling, parties may wish to substitute a
new agreement in place of the old one.
Accordance and Satisfaction: when one party wishes to substitute a
different performance for his or her original duty.
o Accord: the promise to perform the new duty
o Satisfaction: the actual performance of the new duty
Novation: when certain parties to an agreement want to replace one of the
parties with a third party.
o ALL parties must agree to the novation

DISCHARGE BY OPERATION OF LAW
Alteration of contract: If one of the parties alters the contract without the
other partys knowledge or consent, the innocent party is discharged from
their duties
Bankruptcy: When a party files bankruptcy, the court allocates the assets
among creditors and then issues the party a discharge
Tolling of the Statute of Limitations: doesnt technically discharge the
parties from contract but once the statute of limitations tolls, all parties are
no longer able to sue so they are no longer bound to perform
Impossibility of Performance: events occurring that make the obligations
impossible to perform. Two kinds:
o Objective impossibility: it is not possible to lawfully carry out ones
contractual obligations (discharges all parties from their obligations)
o Subjective impossibility: it would be very difficult to carry out the
contract (does NOT discharge the parties from their obligations)
Commercial Impracticability: when performance is still objectively
possibly but would be extraordinarily injurious or expensive to one party
o The following MUST be proven in order for them to be
discharged:
That an event occurred whose nonoccurrence was a basic
assumption of the contract
That there is commercial impracticability of continued
performance
That the party claiming discharge did not expressly or
impliedly agree to performance in spite of impracticability that
would otherwise justify nonperformance
Frustration of Purpose: (not frequently used) when factors beyond the
control of both parties cause the event to not occur, and the nonoccurrence of
this event was not an assumed risk by either party. Therefore, they may be
discharged.

REMEDIES
Legal Remedies (Monetary Damages): include compensatory, punitive, nominal,
and liquidated damages.
Compensatory damages: the MOST FREQUENTLY awarded damages which
are designed to put the plaintiff in the position he would have bee in had the
contract been fully performed
o One can only recover damages only for those provable losses that
were foreseeable at the time he entered the contract
o Sometimes there are no damages to be recovered
Punitive Damages: designed to punish the defendant and deter him and
others from engaging in similar behavior
o Damages are RARELY awarded (unless fraud is involved)
o Wealth and income of the defendant are taken into consideration
when deciding punishment
Nominal Damages: when no actual damages result from a breach in
contract. A small award is granted in order to signify that the plaintiff has
been wronged by the defendant
Liquidated Damages: a fixed amount of damages pre-determined when the
contract was created to avoid a difficult court battle if a breach does occur
Mitigation of Damages: The non-breaching party cannot intentionally
increase their damages as a result of their anger towards the other party.
o In fact, the plaintiff must demonstrate that he used reasonable efforts
to minimize damages resulting from the breach (aka duty to mitigate
ones damages)

Equitable Remedies
Rescission and restitution:
Rescission: termination of the contract
Restitution: the return of any property given up under the
contract
o BOTH are most frequently awarded in situations where there is a
genuine lack of assent.
o May be sought if a party enters the contract because of fraud,
duress, undue influence, or a bilateral mistake
Specific Performance: (aka specific enforcement) It is an order requiring
that the breaching party fulfill the terms of an agreement
o Only granted when monetary damages are not adequate
o Appropriate for REAL ESTATE
Injunction: an order either forcing a person to do something or prohibiting a
person from doing something
o More commonly PROHIBITIONS
Reformation: Sometimes a written contract does not reflect the parties
actual agreement, or there are inconsistencies in the contract, such as the
price being listed as $200,000 (twenty thousand dollars)
o In such a case, the contract may be rewritten to reflect the actual
agreement
Recovery based on Quasi-Contract: recovery granted when an actual
enforceable contract does not exist.
o The court may impose a contract-like obligation on a party to prevent
an injustice from occurring.
o Often occurs when one party thought a contract existed

Chapter 26- Negotiable Instruments: Negotiability and Transferability

Negotiable Instruments: a written document containing the signature of the
creator that makes an unconditional promise or order to pay a certain sum of
money, either at a specified time or on demand.

Contracts as Commercial Paper
A contract is commercial paper and under assignment may be circulated
through the business world

Types of Negotiable Instruments
Draft: an order by a drawer to a drawee to pay the payee (a three party
instrument
o Example: Bob buys oranges from Pat; As a result, Bob now owes Pat
$5. Instead of paying Pat, he draws a draft stating that Susan will pay
Pat $5 since she owes Bob $5 for the apples he sold her
Note: a promise, by the maker of the note, to pay a payee
Demand instrument: where a payee can demand payment at any time.
o If a time of payment is not defined or specifies that payment can be
requested on demand or on sight then it is a demand instrument.
Time Instrument: payment can only be received at a specific future time
o Must be easily determined from the document itself
Certificate of Deposit (CD): a promise by a bank to pay a payee a certain
amount of money at a future time.
o A note of the bank
Check: a specific draft, drawn by the owner of a checking account, ordering
the bank to pay the payee from that drawers account
o ALWAYS a demand instrument
o Types of checks:
Travelers Checks: payable on demand, and requires as a
condition to payment that a co-signature by a person whose
signature appears on the instrument
Cashiers Check: A check used when both the drawer and
drawee are from the same bank
Certified Check: Check accepted by the bank on which it is
drawn
Requirements for an instrument to be negotiable:
o Written document
Must have two characteristics:
Relative permanence: on paper for later proof
Movability: Paper can be moved about in a
commercially reasonable maner
o Be signed by the creator of the instrument
o Contain an unconditional promise or order to pay
MUST be specified, not implied
o Fixed sum of money specified
Payment MUST be in a type of currency
o Payment either on demand or at a fixed time
It cannot say payment to be made 10 days after delivery
without stating when the delivery is to be made
o Contains words to the order of or similar
o Contain no additional promises


Chapter 32- Bankruptcy and Reorganization

Debtor: an entity that owes money to another entity
Creditors: entities to which a debtor owes money
Insolvent debtors: debtors who are unable to pay their bills in a timely fashion
Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of
2005: a revision of the Bankruptcy code for reasons, including an increase in the
number of bankruptcy filings, significant losses associated with bankruptcy filings,
loopholes and incentives that allow/encourage abuse of personal bankruptcy filings,
and the fact the some debtors are actually able to repay a significant amount of their
debt.
BANKRUPTCY LAW IS FEDERAL LAW
Chapter 7: sales of debtors assets by trustee and the distribution of money to
creditors
Chapter 9: Adjustment of municipalitys debt
Chapter 11: Reorganization of the debtors financial affairs under the supervision of
the bankruptcy court
Chapter 12: Reorganization of family farmers debts
Chapter 13: Reorganization of an individuals debts
Chapter 15: Recognition of insolvency proceedings pending in a foreign country
and relief for foreign debtors

Bankruptcy Proceedings:
1. Filing of petition for bankruptcy
2. Court grants an automatic stay for creditors actions against the debtors
estate. (Legal action ceases between the two)
3. Court determine whether an order of relief should be granted
4. The creditors meet with the debtor
5. Some type of payment plan is created and approved, usually by the creditors
and the court
6. Payment plan is carried out through actions of the trustee and the debtor
7. Debts remaining after the payments are carried out are usually dropped.

If an individual files for bankruptcy, the individuals ability to file again is
restricted for a particular time period depending on whether the petition was
dismissed or not.

Chapter 7: Liquidation Proceedings
Liquidation: the most familiar type of bankruptcy; when a debtor turns over
all his assets to a trustee, a person who takes over anothers estate
Debtors: include individuals, partnerships, and corporations
o DO NOT include: Railroads, insurance companies, banks, savings and
loans associations, industrial banks, credit unions, and health
maintenance organizations
Liquidation Proceedings are as follows:
o Petition Filing: a voluntary or involuntary petition must be filed.
The person filings must pay the filing fees
o Voluntary Liquidation Petition
Debtor must state that he is aware of the other bankruptcy
reliefs available and is choosing to go with liquidation
All of the debtors pre-petition assets make up the
bankruptcy estate.
Assets gained after filing the petition by the debtor are
generally not part of the estate unless it falls under
exemption.
Debtor does NOT have to be completely insolvent or unable to
pay debt
He must demonstrate that he owes money to someone.
Must also submit extensive info on their financial affairs
under oath
It is a CRIME to conceal assets or supply information
regarding the debtors financial affairs
o Involuntary Liquidation Petition
If payments arent being made as they become due, creditors
may attempt to force the debtor into bankruptcy.
Creditors may attempt to force debtor to surrender their assets
so that they can be distributed among all of its creditors
12+ debtors
If fewer than 12, a single creditor with a claim of
$12,300+ can file a petition for involuntary Chapter 7
Bankruptcy.
If the judge believes the creditor is filing the petition
frivolously, the court could force the creditor to pay
attorney costs, fees of the debtor, and even punitive
damages.
Farmers, ranchers, and non-profit organizations CANNOT be
forced into liquidation, as well as debtors who are not able to
file bankruptcy on their own (voluntarily)
o Under Chapter 7, the debtor is required to list: (Schedules A-J)
All real property
All personal property
Property in A & B that is exempt
Secured creditors and their addresses
Unsecured priority claims
Unsecured non-priority claims
Executory contracts and expired leases
List of co-debtors
Statement of current income of debtor
Statement of current expenditures
o Dismissal of Petition
A petition, voluntary or not, may be dismissed by the judge
If there is substantial abuse found
o The debtors income is taken into consideration
when determining if they are abusing the system
(the means test)
o Automatic Stay
Moratorium- where creditors are no longer allowed to bring on
or continue legal action against the debtor
Exception: if the debtor was a debtor in a bankruptcy
case that was dismissed within the past year, the stay
automatically terminates 30 days after the current filing
o Order of Relief
If granted, the court proceedings can now continue
Typically this is automatic, unless a debtor objects to an
involuntary petition.
If he/she objects, a hearing will be held. The judge will
grant an order of relief if one of two conditions occur:
o The debtor isnt paying debts as they come due
o The custodian took possession of almost all of
the debtors property within 120 days before
filing
After the court enters an order of relief, a U.S. trustee,
appointed by an attorney general, selects an interim trustee
who is responsible for organizing the creditors meeting.
o Creditors meeting:
Between 20 and 40 days after the order of relief, the interim
trustee calls for the meeting, which includes all of the creditors
listed in the Chapter 7 required schedules.
Everyone attends, including the trustee and debtor
(EXCEPT the bankruptcy judge)
IF the debtor fails to show, the court may decide to
reject the file for bankruptcy
Another purpose of the meeting is to appoint a permanent
TRUSTEE
o The Trustee
Sells the debtors property and distributes the money among
the creditors
Additionally, he has power to sue and be sued, initiate
collection actions and defend against creditor claims, can
resume or reject executor contracts, the right to obtain credit,
and also has the power to void credit liens on the debtors
property
o Exempt Property
Up to $20,200 for residence
Interest in a motor vehicle (not necessarily an automobile) up
to $3,225
Interest, up to $525 for a particular item, in personal and
household goods and furnishings, clothing, appliances, books,
animals, crops, and musical instruments (aggregate total of all
items limited to $10,775)
Interest in jewelry up to $1,350
$1,075 of any property the debtor chooses (functions as a wild
card exemption)
Tools of trade and professional books up to $2,025
Any unmatured life insurance contract owned by the debtor
Professionally prescribed health aides
Interest in any other property up to $1,075, plus any unused
part of the homestead exemption up to $10,125
The right to receive certain personal injury awards up to
$20,200
Retirement funds in an IRA or SEP up to $1,095,000 per person
o Preferential Payments
Payments made within 90 days of filing can be considered
preferential (preferential treatment of one creditor over
another by a debtor)
The debtor is assumed to be insolvent within 90 days of
filing for Chapter 7
If the preferred creditor is a relative or a partner, the trustee
may recover payments from up to 2 years prior.
However, he must prove the debtors insolvency
compared to an outsider preferred creditor where he
could only recover from 90 days prior and the
insolvency is assumed
o Fraudulent Transfers
Made with the intent to defraud creditors
o Distribution of Property
Priority Claims
Class 1: Unpaid domestic support (alimony, child
support)
Class 2: Court costs, trust fees, etc
Class 3: Unsecured claims in involuntary bankruptcy
(ordinary business expenses)
Class 4: Unsecured claims for unpaid wages, salaries
(within 180 days)
Class 5: Employee retirement plans
Class 6: Claims by fishers, farmers,
Class 7: Deposits given to debtor for property or service
not yet performed
Class 8: Certain taxes and penalties due to govt unites
Class 9: claims in bankruptcy related to Federal deposit
institutions
Class 10: Claims for personal injuries and deaths related
to debtors property or company
o Discharge:
Court order stating that debtor is immune to any and all
creditor collections
Available ONLY to individuals (not corps or businesses)
Privilege, not a right.
o Exemptions to Discharge:
Claims for back taxes or fines within 3 years
Claims for liabilities against debtor for obtaining money or
property under false pretenses or fraud
Claims by creditors not listed in schedule or have no
knowledge of the court proceedings
Claims based on fraud, embezzlement, and larceny
Alimony, child support and property settlements
Claims of willful or malicious conduct that caused injury or
death
Specific student loans, unless it poses undue hardship on
debtor
Claims resulting from drunk driving
Debts not discharge from previous bankruptcies
Claims for money borrowed to pay US taxes
Cash advances on a credit card
o Objections to Discharge:
The debtor has concealed or destroyed property in attempt to
defraud creditors
Debtor has concealed or destroyed financial records
Debtor fails to account for loss of assets
o Revocation of Discharge:
If debtor acted fraudulently during proceedings
o Reaffirmation of Debt
When a debtor decides to repay debt even though it was
discharged (to a family member?) to maintain a good
relationship