Secured transactions: attachment then perfection
Attachment makes the security interest enforceable against the debtor. It requires: (1) value given by the creditor, (2) the debtor has rights in the collateral, and (3) a security agreement authenticated by the debtor (or the creditor takes possession/control).
Perfection makes it effective against third parties. Methods: filing a financing statement (most common), possession, control (deposit accounts, investment property), or automatic perfection (a PMSI in consumer goods).
Priority rules
| Contest | Winner |
|---|---|
| Perfected vs. unperfected | Perfected |
| Two perfected creditors | First to file or perfect |
| Two unperfected creditors | First to attach |
| PMSI in inventory | Priority if perfected before the debtor receives the goods and notice is given to existing secured parties |
| PMSI in non-inventory (equipment) | Priority if perfected within 20 days of the debtor receiving possession |
| Buyer in the ordinary course of business | Takes free of a security interest created by the seller, even if perfected |
Bankruptcy chapters
- Chapter 7 — liquidation; trustee sells non-exempt assets and distributes
- Chapter 11 — business reorganization
- Chapter 13 — individual with regular income repays under a plan
IMPORTANT — order of distribution: Secured creditors are paid first from their collateral (any shortfall becomes an unsecured claim). Then come priority unsecured claims, in order: domestic support obligations; administrative expenses; gap creditors; wages within limits; employee benefit plan contributions; certain farmer/fisherman claims; consumer deposits; certain taxes. General unsecured creditors come next, and equity holders last.
Avoidable transfers
- Preference — payment to a creditor on an antecedent debt within 90 days before filing (one year for insiders) while insolvent, giving that creditor more than it would receive in Chapter 7
- Fraudulent transfer — transfer with intent to hinder/delay/defraud creditors, or for less than reasonably equivalent value while insolvent, within two years
EXAM TIP: Debts not discharged include most taxes, student loans (absent undue hardship), domestic support, debts from fraud or willful and malicious injury, and DUI-related personal injury claims.