8: Debtor and creditor relations

Pregunta	Respuesta
In a secured transaction, the promisor	pledges property as a guarantee that she will perform her obligation. This pledged property is a security that is collateral to the main purpose of the contract between the parties.
Mortgages, pledges, and conditional sales are examples of	traditional secured transactions that create a security interest in property.
In a conditional sale	the buyer has possession of the goods and a seller retains title as security for the full purchase price
A chattel mortgage is	a mortgage on personal property. The borrower transfers an interest in property to the lender as security for a debt.
In a pledge or pawn	the owner of the property transfers possession of the goods to a pawnbroker, the creditor, to hold as security until the owner repays his or her debt. If the debt is not paid on time, the pawnbroker may sell the item to recover the debt.
(PPSA)	Personal Property Security Act
The purpose of a PPSA is to protect creditors and innocent third parties. It does this by doing the following:	• It creates a single system where all security interests in personal property are registered. • It provides rules for ranking various parties’ security interests by priority. • It defines the remedies that are available to a secured party.
A security interest must go through the steps of	creation, attachment, and perfection in order for the creditor to have priority over other creditors.
The first party to complete all three required steps will have priority even if a subsequent creditor is aware of the unperfected security interest of a prior creditor. The required steps are as follows:	• creation of a security interest by entering into a contract • attachment, which occurs at the time the debtor receives value in exchange for the security • perfection, which can happen when the creditor obtains possession of the security, or when the creditor files a document called a financing statement, which sets out details regarding the security interest
The PPSA applies to the usual types of security interest, as well as consignments and leases intended as security interests. It also covers	licenses, shares, bonds, intellectual property, and other tangible goods
In case of default by the debtor, a secured creditor has several recourses available under the PPSA:	• The creditor can repossess the goods, although some provinces do not allow repossession if a significant amount of the debt has been repaid. • In certain circumstances, a creditor can resell the goods and sue the buyer for any unpaid balance, although some jurisdictions require the creditor to either seize or sue, but not both. A defaulting debtor has the right to redeem • Instead of reselling the goods, the secured creditor can decide to retain them. When a secured creditor keeps the goods to satisfy the debt, the creditor cannot sue the debtor for any supposed loss on the transaction.
In case of default by the debtor, a secured creditor has several recourses available under the PPSA:	• The creditor can repossess the goods, although some provinces do not allow repossession if a significant amount of the debt has been repaid. • In certain circumstances, a creditor can resell the goods and sue the buyer for any unpaid balance, although some jurisdictions require the creditor to either seize or sue, but not both. A defaulting debtor has the right to redeem • Instead of reselling the goods, the secured creditor can decide to retain them. When a secured creditor keeps the goods to satisfy the debt, the creditor cannot sue the debtor for any supposed loss on the transaction.
Guarantees can be used to obtain	security for a debt. With corporations, a personal guarantee signed by the shareholder or shareholders of the corporation is a commonly used tool to circumvent the limited liability of the shareholders inherent in a corporation. A guarantee involves an obligation that arises only in the event of a default. The guarantor agrees that if the debtor fails to pay a debt owed, he or she will pay.
The federal Bank Act legislation was in effect prior to the provincial PPSAs being brought into force. The Act set up the right for banks to	to take a security interest not available to other creditors. The Bank Act allows Canadian banks to take a security interest under section 427 from certain types of debtors.
In Canada, we have the federal Bankruptcy and Insolvency Act (BIA). It has a number of functions:	• It sets up a uniform practice in bankruptcy and insolvency proceedings, and is intended to be as inexpensive as possible. • It sets out methods for reorganizing the debtor’s business by working out an arrangement by agreement with the creditors. • It attempts to provide for an equitable distribution of the debtor’s assets among the creditors. • It releases debtors by forgiving their debts and allowing them to control their finances again.
The BIA covers three categories of persons:	insolvent persons, persons who declare themselves bankrupt, and those forced into bankruptcy by their creditors.
Three different procedures are available under the BIA:	a proposal, an assignment, and a receiving order.
A proposal is	an agreement between the debtor and his or her creditors to allow the debtor to reorganize his or her affairs so that bankruptcy may be avoided.
Consumer proposals, also known as Division II proposals, may only be made by individuals whose debts	, not including a debt secured by a mortgage on a principal residence, total less than $75,000.
An assignment occurs when	an insolvent debtor voluntarily declares bankruptcy and files a “statement of affairs,” which sets out the debts owed to the identified creditors and states whether the amounts owed are secured, preferred, or unsecured.
If the creditors place the insolvent debtor into bankruptcy, they will do so by petitioning the court for a	a receiving order
two main purposes of the Bankruptcy and Insolvency Act:	to work with the debtor to try to pay back the creditors as much and as fairly as possible, and to assist the debtor in working through financial difficulties in order to become productive again.
The trustee has enormous powers and takes control of the debtor’s	assets such as bank accounts, accounts receivables, books, documents, vehicles, and property, including the debtor’s house. The trustee must determine what property the debtor has and what can be used to satisfy the creditors. The Act clearly sets out what assets and financial limit the bankrupt individual can retain.
The trustee has enormous powers and takes control of the debtor’s	assets such as bank accounts, accounts receivables, books, documents, vehicles, and property, including the debtor’s house. The trustee must determine what property the debtor has and what can be used to satisfy the creditors. The Act clearly sets out what assets and financial limit the bankrupt individual can retain.
A settlement is a	a gift of property, made gratuitously, within one year before bankruptcy
A settlement is a	a gift of property, made gratuitously, within one year before bankruptcy
A fraudulent preference is	is a payment or a transfer of property to a creditor (who was aware of the impending bankruptcy) by an insolvent debtor within the last three months prior to bankruptcy in order to give an advantage to that creditor over other creditors. These can be reversed by the trustee.
A reviewable transaction is a	a transaction that is not at arm’s length, was made within the 12 months preceding bankruptcy, and was not for fair market value. Those not at arm’s length include relatives and corporations in which the debtor has a substantial interest.
A reviewable transaction is a	a transaction that is not at arm’s length, was made within the 12 months preceding bankruptcy, and was not for fair market value. Those not at arm’s length include relatives and corporations in which the debtor has a substantial interest.
Priority is given to	secured creditors who have priority with respect to the assets in which they have a security interest.
The preferred creditors are	are next in line. Preferred creditors are defined in the BIA and they must be paid in full in the order listed in the BIA. For example, funeral expenses must be paid first, followed by costs of the bankruptcy action, then arrears in wages to a maximum of $2,000 for back wages owed for the last six months.
The preferred creditors are	are next in line. Preferred creditors are defined in the BIA and they must be paid in full in the order listed in the BIA. For example, funeral expenses must be paid first, followed by costs of the bankruptcy action, then arrears in wages to a maximum of $2,000 for back wages owed for the last six months.
Once the claims of the preferred creditors are completely paid, the trustee will distribute the proceeds from the remaining assets on a	pro rata basis to the general creditors
During the term of the bankruptcy proceedings and prior to discharge from bankruptcy, the bankrupt individual must co-operate with the trustee, and may not	be a director of a corporation, nor borrow more than $500 without declaring he or she is bankrupt.
Once the creditors have been paid, debtors may make application to the court to be	discharged from bankruptcy proceedings. Discharge is discretionary; the court may refuse to grant the discharge. Discharge cancels the unpaid portion of the debts previously owed, so any assets gained after this time belong to the individual who was previously declared bankrupt. The discharged bankrupt is then free to start over, albeit with difficulty obtaining credit.
Personal property can be divided into two classes:	goods and choses in action.
Negotiable instruments are a form of	choses in action: a right or claim of some value that can be enforced by an action in the courts
A negotiable instrument is a	written document that provides evidence of a right in some kind of intangible property. It is a contract containing a promise, express or implied, to pay a specific sum of money to the order of a specific person or to a bearer.
While a cheque is the most commonly used form of negotiable instrument, other types include	bills of exchange (or bank drafts) and promissory notes.
Unlike in the case of assignments, the person who has the negotiable instrument, known as a	“holder in due course,” can enforce rights under the negotiable instrument despite problems between other parties, as long as certain conditions are met. These conditions include the following: • The person receiving the negotiable instrument must be innocent and must have no knowledge of irregularity of the instrument. • Consideration must have been given for the instrument. • The instrument must be received in good faith. • The instrument must be an unconditional promise to pay a set sum on demand or at a later date.
If a negotiable instrument is marked “Consumer Purchase,” the normal laws relating to	a holder in due course do not apply.
With a cheque, the drawer is	notifying his bank (the drawee) to pay funds to a third party, called the payee, in the amount set out on the cheque. Funds are payable by the drawee on demand — that is, when the payee presents the cheque to the bank.
A bill of exchange or draft also notifies a drawee to pay funds to the payee; however,	, in this case, the drawee does not need to be a bank, and the funds are to be paid as set out, which is not necessarily on demand
A promissory note is simply an	acknowledgement that the maker of the note owes funds to the payee: the maker of the note promises to pay the payee according to the terms on the note.

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