The Legal Environment of Business: A Critical Thinking Approach
25-1
Chapter 25
Laws of Debtor–Creditor Relations and
Consumer Protection
Introduction
Chapter Twenty-Five addresses these questions:
• What are the dimensions of Debtor–Creditor Relations?
• What are the provisions of the federal Bankruptcy Code and the incorporation of the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?
• How has consumer law evolved?
• Which specific federal laws govern trade practices and consumer–business relationships?
• What federal laws focus on consumer credit arrangements and business debt-collection
practices?
• What is the Dodd-Frank Act and what are the laws related to consumer protection?
• What are the different state consumer legislations?
• What are the global dimensions of consumer protection laws?
Achieving Teaching Excellence
The Importance of the Campus Atmosphere
The final Teaching Excellence section of this Instructor’s Manual looks at a different
aspect of teaching and critical thinking. This Instructor’s Manual has asked instructors to take a
fresh look at their behavior in class, and their students’ behavior in class. Additionally, these
The Legal Environment of Business: A Critical Thinking Approach
25-2
An instructor’s own efforts are important, but sometimes as instructors they need to change
things around to make sure they are doing their best work with and for the students. This final
section of the Instructor’s Manual asks instructors to look at the atmosphere on the campus.
Does the campus encourage the growth of critical thinking skills?
In an article entitled “Preconditions for Encouraging Critical Thinking on the Campus,” M.
Browne first explains that “a campus that has critical thinking instruction as a high priority
must integrate its efforts across the curriculum.” If only one instructor uses a critical thinking
approach, it will be a challenge for the instructor to get his or her students to internalize the
Now, the question arises as to what instructors can do if their campus does not provide the
kind of environment that urges them to achieve Teaching Excellence. If jobs for faculty
members were plentiful, instructors could all look for the campus environment most consistent
The Legal Environment of Business: A Critical Thinking Approach
25-3
References
Chapter Overview, Topic Outline, and Discussion Questions
Chapter Overview
This chapter describes debtor–creditor relationships; the Bankruptcy Act of 2005, which
amends the federal Bankruptcy Code; and the evolution of consumer law through legislation and
case law. It then examines major federal legislation governing such trade practices as
advertising, labeling, and the issuance of warranties on products. Federal laws pertaining to the
credit arrangements entered into by consumers and the debt-collection practices of businesses are
discussed, as are state laws governing consumer transactions. The chapter ends with an
examination of the global dimensions of consumer protection laws.
Topic Outline
I. Debtor–Creditor Relations
A. Rights of and Remedies for Creditors
2. Mortgage Foreclosure
B. Rights and Remedies for Debtors
1. Exemptions to Attachments
II. The Federal Bankruptcy Code and the Incorporation of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005
A. History and Background
The Legal Environment of Business: A Critical Thinking Approach
25-4
1. Provisions
B. Bankruptcy Management and Proceedings
1. Courts
3. Bankruptcy Schedules
4, Creditors’ Meeting
6. Automatic Stay
8. Bankruptcy Estate
10. State Exemption
11. Fraudulent Transfers
C. Chapter 7
1. Discharge of Debts
a. In re Savage v. United States Bankruptcy
2. Statutory Distribution of Property
D. Chapter 13
E. Chapter 11
2. Small Business Bankruptcy
F. Chapter 12
G. The New Bankruptcy Law – 2011
III. The Evolution of Consumer Law
A. Economics
IV. Federal Regulation of Business Trade Practices and Consumer–Business Relationships
A. The Federal Trade Commission: Functions, Structure, and Enforcement Powers
2. Structure and Enforcement Powers
B. Deceptive and Unfair Advertising
1. Deceptive Advertising
3. Private-Party Suits and Deceptive Advertising
4. The FTC and Deceptive Labeling and Packaging
a. Paduano v. American Honda Motor Co.
C. Consumer Legislation
2. Consumer Warranties
25-5
3. Full or Limited Warranties
5. Telemarketing Legislation
V. Federal Laws Regulating Consumer Credit and Business Debt-Collection Practices
A. Truth-In-Lending Act
1. Goals
3. Provisions
5. Finance Charges
7. Right to Cancel
9. Credit Advertising
10. Remedies
a. Household Credit Services, Inc. v. Pfenning
B. Credit Card Accountability, Responsibility and Disclosure Act of 2009
2. Fees
4. Billing Practices
C. The Electronic Fund Transfer Act
2. Provisions
3. Remedies
D. A Plastic Society
E. The Fair Credit Reporting Act
2. Provisions
a. Safeco Insurance Co. v. Burr
3. Remedies
F. Identity Theft and Credit Ratings
G. Equal Credit Opportunity Act
2. Provisions
3. Remedies
H. The Fair Credit Billing Act
1. Goals
3. Remedies
I. The Fair Debt Collection Practices Act
The Legal Environment of Business: A Critical Thinking Approach
25-6
3. Remedies
VI. Dodd-Frank Act and Consumer Protection
A. Credit and Debit Cards
VII. State Consumer Legislation
A. Uniform Consumer Credit Code
VIII. Global Dimensions of Consumer Protection Laws
IX. Summary
Discussion Questions for Chapter Twenty-Five
1. Explain how the ideas of laissez-faire and caveat emptor are related.
Laissez-faire economic philosophy presents a revolt against government regulation. This
2. Evaluate this statement: The federal government has developed an efficient, coordinated
plan in the area of consumer protection laws and regulations.
3. Explain relationships between deception and puffery.
The most important relationship is that deception is illegal, whereas puffery is not. Puffery is
4. Evaluate this statement: The FTC requires manufacturers and sellers of consumer products
to give express warranties.
The Legal Environment of Business: A Critical Thinking Approach
25-7
The FTC does not require manufacturers and sellers of consumer products to give express
5. Explain relationships between full and limited warranties.
A full warranty is a written protection for buyers that guarantees free repair of a defective
6. Explain relationships between the Truth-in-Lending Act and the Equal Credit Opportunity
Act.
7. Explain relationships between the Fair Credit Billing Act and the Fair Debt Collection
Practices Act.
8. Evaluate this statement: Consumers need credit card insurance in case their credit cards are
stolen.
25-8
9. Explain relationships between Chapters 7, 11, and 13 of the Bankruptcy Reform Act.
All three are forms of bankruptcy. They differ in terms of what happens to the debts, and
what happens to the person or business that went bankrupt. Under Chapter 7 (liquidation),
10. Evaluate this statement: Federal preemption precludes states from regulating in the area of
consumer protection.
This statement is flawed. States also regulate in the area of consumer protection. For
Answers to Critical Thinking about the Law Questions, Case Summaries,
Answers to Review Questions, Review Problems, and Case Problems
Suggested Answers to Critical Thinking about the Law
1. Ethically, Woodcock should have raised the issue that his payments could not be differed as
2. The ethical norm that is closely attached to the theme of personal responsibility is security.
Case Summary—In re Savage v. United States Bankruptcy
This case considers the concept of “undue hardship” in the context of an individual who
wants to discharge student loans. A court had discharged all but $3,120 of a total student loan
The Legal Environment of Business: A Critical Thinking Approach
25-9
Suggested Answers to Critical Thinking about the Law Questions
1. The legal rule is: To prove undue hardship … a debtor must show that her necessary and
reasonable expenses leave her with too little to afford repayment. Additionally, she has to
2. The case considers several ambiguous words and phrase, e.g., “undue hardship,”
Case Summary—RadLAX Gateway Hotel, LLC v. Amalgamated Bank
This case involved the construction of a parking structure at Los Angeles International
Airport. To finance the purchase, the debtors, RadLAX Gateway Hotel, LLC and RadLAX
Gateway Deck, obtained a $142 million loan from Longview Ultra Construction Loan
Investment Fund. Amalgamated Bank served as trustee. The lenders obtained a blanket lien on
Case Summary—Federal Trade Commission v. Verity International, Ltd.
The Federal Trade Commission (FTC) accused Verity International and Automatic
Communications of deceptive practices under Section 5 of the FTCA. Verity and Automatic
Communications were deceptively charging pornography viewers using phone rather than credit
The Legal Environment of Business: A Critical Thinking Approach
25–10
card charges. The appellant court found that the companies acted in a misleading manner,
Case Summary—Federal Trade Commission v. QT, Inc.
This case is about the deceptive advertising used by QY, Inc. QT falsely advertised that their
Suggested Answers to Critical Thinking about the Law Questions
1. QT might argue that individuals’ testimonies prove that the bracelets had worked and that
2. Judge Easterbrook is suggesting that anyone can make a claim but just because a man says
Case Summary—Paduano v. American Honda Motor Co.
In 2004, Gaetano Paduano brought a new Honda Civic Hybrid in California. The
information label on the car stated that the fuel economy estimates from the EPA were 47 miles
per gallon (mpg) for city driving and 48 mpg for highway driving. Honda’s sales brochure
conventional vehicle.
Case Summary—Household Credit Services, Inc. v. Pfenning
This case considers whether an “over–limit fee” is a finance charge that should have been
The Legal Environment of Business: A Critical Thinking Approach
25–11
Case Summary—Safeco Insurance Co. v. Burr
This case determined that Safeco Insurance and GEICO General Insurance were not guilty
Suggested Answers to Critical Thinking about the Law Questions
1. The Court found that GEICO and Safeco would have recklessly been disregarding the law if
2. If GEICO or Safeco had charged their applicants a higher initial rate because of the credit
score, they would have violated a statute of the Fair Credit Reporting Act.
Case Summary—Jerman v. Carlisle, NcNellie, Rini, Kramer & Ulrich, LPA
Carlisle filed a complaint in Ohio state court on behalf of a client, Countrywide Home
Loans, Inc. Carlisle sought foreclosure of a mortgage held by Countrywide in real property
owned by Karen Jerman. The complaint included a “Notice,” later served on Jerman, stating that
the mortgage debt would be assumed to be valid unless Jerman disputed it in writing. Jerman’s
Answers to Review Questions
25-1. In the creditor–debtor context garnishment refers to an order of the court granted to a
creditor to seize wages or bank accounts of a debtor. This can be either a postjudgment or
25-2. The Bankruptcy Act of 2005 changed the Federal Bankruptcy Code with an eye toward
reducing bankruptcy filings. The new law changes eligibility for filing, and which debts
25-3. The FTC is most concerned about deceptive advertising concerning prices, product
25-4. A contract of suretyship allows a third person to pay the debt of another (debtor) that is
25-5. A consumer credit reporting agency must disclose the following: notice to the consumer
whenever he or she has been adversely affected by an adverse credit report from a
25-6. The FTC can issue injunctions. Also, individuals can pursue actions for both actual and
Answers to Review Problems
25-7. a. Burke can file a voluntary bankruptcy petition under Chapter 12. However, under
bankruptcy exemptions she would be able to retain her farm and would not have
25-8. In this case, Montoro can file for Chapter 7 bankruptcy and he has to turn all assets over
25–13
25-9. With regard to notice, the court followed the majority of courts which have addressed the
issue and concluded that debt collectors such as OMBE are required to clearly make the
statutory disclosures in every communication to a debtor. OMBE’s motion for summary
25-10. In the case Sears, Roebuck and Co. v. Federal Trade Commission, 676 F.2d 385 (1982),
the United States Court of Appeals for the Ninth Circuit found in favor of the Federal
Trade Commission (FTC). In light of the flagrant and egregious nature of the violation
25-11. No. Investigative Reports must let Millstone present his side of the story. He should be
allowed to write for his file an explanation that includes his denial that he is a hippie,
Answers to Case Problems
25-12. Yes, filing a lawsuit in state court can be considered as “initial communication.”
25-13. The district court rejected the company’s arguments and permanently enjoined it from
further debt collection activities. The district court also enjoined the company from
selling off any remaining debt that was owed and found it liable for more than $10
The Legal Environment of Business: A Critical Thinking Approach
25-14. The appellate court rejected the NYSRA’s challenge to Regulation 81.50, concluding that
it was not preempted by the NLEA and did not violate NYSRA’s member restaurants’
First Amendment rights. In support of its decision the court opined that in requiring chain
25-15. CrossCheck, Inc. won the case as it did not violate the FDCPA. The court ruled that
25-16. The defendants did violate the FCRA. The court held that conducting bank searches for
third parties by repeatedly using credit reports for the purpose of developing additional
Thinking Critically about Relevant Legal Issues
1. The author downplays freedom (for companies to act without restriction from FTC
2. The relevant rule of law would highlight the extent to which companies are allowed to
engage in manipulative or deceptive advertising.
4. The opposing argument would focus on the lack of evidence that children are so easily
fooled, so easily disappointed, and so quick to become cynical.