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Flashcards in Bankruptcy Deck (65):
1

A voluntary petition filed under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code

  • Is not available to a corporation unless it has previously filed a petition under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code.
  • Automatically stays collection actions against the debtor except by secured creditors.
  • Will be dismissed unless the debtor has 12 or more unsecured creditors whose claims total at least $5,000.
  • Does not require the debtor to show that the debtor's liabilities exceed the fair market value of assets.

Does not require the debtor to show that the debtor's liabilities exceed the fair market value of assets. This is balance sheet insolvency, and the debtor does not have to make such a showing. So long as the debtor is not abusing the bankruptcy relief laws, the debtor may file for Chapter 7 protection.

2

Unger owes a total of $50,000 to eight unsecured creditors and one fully secured creditor. Quincy is one of the unsecured creditors and is owed $6,000. Quincy has filed an involuntary bankruptcy petition against Unger under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Unger has been unable to pay debts as they become due. Unger's liabilities exceed Unger's assets. Unger has filed papers opposing the bankruptcy petition.

Which of the following statements regarding Quincy's petition is correct?

  • It will be dismissed because the secured creditor failed to join in the filing of the petition.
  • It will be dismissed because three unsecured creditors must join in the filing of the petition.
  • It will be granted because Unger's liabilities exceed Unger's assets.
  • It will be dismissed because Unger's debt to Quincy alone is less than the required limit to bring an involuntary petition.

It will be dismissed because Unger's debt to Quincy alone is less than the required limit to bring an involuntary petition. An involuntary petition may succeed if the aggregate unsecured claims of the petitioners equals or exceeds $14,725. Quincy's claim of $6000 alone does meet that limit.

3

Which of the following statements is (are) correct regarding debtors' rights?

  • I. State exemption statutes prevent all of a debtor's personal property from being sold to pay a federal tax lien.
  • II. Federal Social Security benefits received by a debtor are exempt from garnishment by creditors.

II Only.  Exemption statutes never apply to all personal property. They may exempt selected items, such as a computer, clothes, bibles, trade equipment, and furniture. A creditor cannot seize any and every asset to satisfy a debt. Social Security benefits are exempt from garnishment.

4

Which of the following pre-judgment remedies would be available to a creditor when a debtor owns no real property?

  • Writ of attachment    
  • Garnishment

Both...

Garnishment is the legal process of having sums deducted directly from a debtor's paycheck to satisfy a debt. Clearly, no real property is necessary for garnishment. Under a writ of attachment, a debtor's property is seized so that, if a creditor wins a judgment, something will be available to pay the judgment. There is no need for the property to be real property, such as land or a house; it is usually personal property, such as cars or boats.

5

Which of the following conditions, if any, must a debtor meet to file a voluntary bankruptcy petition under Chapter 7 of the Federal Bankruptcy Code?

  • Insolvency    
  • Three or more creditors  

NO to BOTH. Neither is required. Almost anyone can file a voluntary petition for Chapter 7 relief at any time regardless of the number of creditors. The only restriction is that the filing is not a "substantial abuse," but neither of these choices inherently indicates substantial abuse.

 

6

To file for bankruptcy under Chapter 7 of the Federal Bankruptcy Code, an individual must

  • Have debts of any amount.
  • Be insolvent.
  • Be indebted to more than three creditors.
  • Have debts in excess of $5,000.

Have debts of any amount. Debts must exist in some amount. Otherwise, there is nothing from which a person needs protection. However, there is no minimum amount of debt. So long as the filing is not a "substantial abuse of the process," as when a millionaire tries to declare bankruptcy based on minor credit card debts, the filing is valid.

7

On February 28, 2005, Master, Inc., had total assets with a fair market value of $1,200,000 and total liabilities of $990,000. On January 15, 2005, Master made a monthly installment note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note.

On March 15, 2005, Master voluntarily filed a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold for less than the balance due on the note to Acme.

If a creditor challenged Master's right to file, the petition would be dismissed:

  • If Master had fewer than 12 creditors at the time of filing.
  • Unless Master can show that a reorganization under Chapter 11 of the Federal Bankruptcy Code would have been unsuccessful.
  • Unless Master can show that it is unable to pay its debts in the ordinary course of business or as they come due.
  • If Master is an insurance company.

If Master is an insurance company. Chapter 7 relief may be sought by almost any person or company, provided that they have some outstanding debt. However, there are exceptions. Insurance companies may not file a voluntary petition for Chapter 7 relief.

Same applies to SLL's, Credit Unions, SBA, RR & Municipalities

8

The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code

  • Terminates liens on exempt property.
  • Terminates all security interests in property in the bankruptcy estate.
  • Stops the debtor from incurring new debts.
  • Stops the enforcement of judgment liens against property in the bankruptcy estate.

Stops the enforcement of judgment liens against property in the bankruptcy estate. Once a bankruptcy petition is filed, the enforcement of any lien against this property is stopped pending a resolution through bankruptcy proceedings.

B is incorrect because a security interest is essentially a right to repossess collateral if a loan is not repaid. For example, when taking out a mortgage loan from a bank, the house is normally the collateral and may be seized by the lender if mortgage payments are not made. This interest is generally not terminated by the filing of an involuntary bankruptcy petition.

9

Which of the following statements is correct concerning what constitutes a debtor's bankrupt property estate?

  • The appreciated value, since the petition was filed, of the debtor's stamp collection.
  • A flat screen TV set purchased 30 days after the filing of the debtor's petition.
  • Property left to the debtor by her grandmother, who passed away nine months after the petition was filed.
  • Wages earned within 180 days of the petition being filed.

The appreciated value, since the petition was filed, of the debtor's stamp collection. The debtor's property includes not only the original property value, but any value appreciation of that property after the petition is filed.

10

Which of the following is correct?

  • A bankrupt accounting limited liability partnership can claim the same type and amount of exemptions as an individual bankrupt debtor.
  • A debtor's interest in a motor vehicle is not exempt.
  • Since federal law generally governs bankruptcy proceedings, federal law exemptions take priority over state-law exemptions when both cover the same items.
  • Unless the state has limited a bankrupt debtor to use of state-law exemptions, the debtor has a choice of using either state or federal-listed exemption laws.

Unless the state has limited a bankrupt debtor to use of state-law exemptions, the debtor has a choice of using either state or federal-listed exemption laws.

11

On February 28, 2005, Master, Inc. has total assets with a fair market value of $1.2mn and total liabilities of $990,000.

On January 15, 2005, Master made a monthly installment-note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment, having a fair market value greater than the balance due on the note. On March 15, 2005, Master voluntarily files a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment is sold for less than the balance due on the note to Acme.

Master's payment to Acme could:

  • Be set aside as a preferential transfer, because the fair market value of the collateral was greater than the installment-note balance.
  • Be set aside as a preferential transfer, unless Acme showed that Master was solvent on January 15, 2005.
  • Not be set aside as a preferential transfer, because Acme was oversecured.
  • Not be set aside as a preferential transfer if Acme showed that Master was solvent on March 15, 2005.

Not be set aside as a preferential transfer, because Acme was oversecured. A payment is not preferential if it is not more than the creditor would have received in a bankruptcy proceeding. Since Acme has a perfected security interest, its rights are unaffected by the bankruptcy proceeding, and it retains the right to receive repayment of its debt without having the payments set aside.

12

Which of the following statements is correct?

  • Failure of the debtor to attend (unless excused) the creditor's meeting is a failure to co-operate and grounds for denial of the debtor's discharge in a Chapter 7 bankruptcy.
  • A written statement signed by the debtor that s/he has attended sessions with an approved credit-counseling agency is required as a duty of the debtor.
  • If the court finds that a debtor meets the median-family-income test, the court cannot dismiss a Chapter 7 petition based on abuse.
  • A copy of the debtor's federal tax return for the most recent year prior to filing is not required, owing to the privacy right of the debtor.

Failure of the debtor to attend (unless excused) the creditor's meeting is a failure to co-operate and grounds for denial of the debtor's discharge in a Chapter 7 bankruptcy. Failure of the debtor to attend all hearings subject to bankruptcy proceedings is grounds for denial of discharge of the debtor's debts. A debtor is usually required to appear at a creditor's meeting and may, under oath, be examined for information, such as the amount and whereabouts of assets. Such failure to appear is deemed a failure to co-operate.

One of the requirements for the debtor's filing of a Chapter 7 petition is to include a certificate from an approved credit-counseling agency attesting to his or her attendance at said agency.

13

On May 1, 2003, two months after becoming insolvent, Quick Corp., an appliance wholesaler, files a voluntary petition for bankruptcy under the provisions of Chapter 7 of the Federal Bankruptcy Code. On October 15, 2002, Quick's Board of Directors had authorized and paid Erly $50,000 to repay Erly's April 1, 2002, loan to the corporation. Erly is a sibling of Quick's president. On March 15, 2003, Quick paid Kray $100,000 for inventory delivered that day.

Which of the following is not relevant in determining whether the repayment of Erly's loan is a voidable preferential transfer?

  • Erly is an insider.
  • Quick's payment to Erly was made on account of an antecedent debt.
  • Quick's solvency when the loan was made by Erly.
  • Quick's payment to Erly was made within one year of the filing of the bankruptcy petition.

Quick's solvency when the loan was made by Erly. Solvency at the time the debt is incurred has nothing to do with whether payments made to Erly now are preferential. To be a preferential payment, the debt must only have been antecedent (incurred before the bankruptcy petition was filed), and insolvency of the debtor determined at time of payment.

If a creditor is an insider, the creditor cannot receive a preferential payment within one year of the filing of the bankruptcy petition from an insolvent debtor. An insider is someone who has a close relationship with the debtor. Business associates are often classified as insiders.

14

Under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code, certain property acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate.

An example of such property is

  • Municipal-bond interest received by the debtor within 180 days of the filing of the petition.
  • Alimony received by the debtor within one year of the filing of the petition.
  • Social Security payments received by the debtor within 180 days of the filing of the petition.
  • Gifts received by the debtor within one year of the filing of the petition.

Municipal-bond interest received by the debtor within 180 days of the filing of the petition.

A debtor's estate in bankruptcy consists of all tangible and intangible property of the debtor held at the commencement of the bankruptcy proceedings. In addition, the estate consists of any after-acquired income from such property.

Therefore, interest from municipal bonds (held as part of the estate) also becomes part of the estate. Any gifts received within 180 days of the filing the petition also become part of the estate. All other payments received after the filing of the petition are not considered income from the existing debtor's (bankruptcy) estate.

Therefore, B and C are incorrect, because they are payments received after the filing of the petition, and are not considered income from the existing debtor's (bankruptcy) estate.

D is incorrect, because it is a gift received more than 180 days after the filing of the petition.

15

Under the federal Bankruptcy Code, which of the following rights or powers does a trustee in bankruptcy not have?

  • The power to prevail against a creditor with an unperfected security interest.
  • The power to require persons holding the debtor's property at the time the bankruptcy petition is filed to deliver the property to the trustee.
  • The right to use any grounds available to the debtor to obtain the return of the debtor's property.
  • The right to avoid any statutory liens against the debtor's property that were effective before the bankruptcy petition was filed.

The right to avoid any statutory liens against the debtor's property that were effective before the bankruptcy petition was filed. This answer is correct, because although the trustee can avoid some statutory liens (such as landlord's lien), the trustee cannot avoid all (key word is "any") statutory or common law liens (such as certain warehouse liens).

16

On February 28, 2005, Master, Inc. has total assets with a fair market value of $1.2mn and total liabilities of $990,000. 

On January 15, 2005, Master made a monthly installment-note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note.
On March 15, 2005, Master voluntarily files a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold to Acme for less than the balance due on the note .

Which of the following statements correctly describes Acme's distribution from Master's bankruptcy estate?

  • Acme will receive the total amount it is owed, even if the proceeds from the sale of the collateral were less than the balance owed by Master.
  • Acme will have the same priority as unsecured general creditors, to the extent that the proceeds from the sale of its collateral are insufficient to satisfy the amount owed by Master.
  • The total proceeds from the sale of the collateral will be paid to Acme, even if they are less than the balance owed by Master, provided there is sufficient cash to pay all administrative costs associated with the bankruptcy.
  • Acme will receive only the proceeds from the sale of the collateral in full satisfaction of the debt owed by Master.

Acme will have the same priority as unsecured general creditors, to the extent that the proceeds from the sale of its collateral are insufficient to satisfy the amount owed by Master. If this sale does not generate enough to cover the entire debt, then Acme becomes a general creditor for that portion of the debt. A perfected secured creditor only has a special priority right to the security interest, or collateral. When the collateral has been disposed of, it must wait in line for further payments with everyone else.

17

Which of the following claims would have the highest priority in the distribution of a bankruptcy estate under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code if the petition was filed June 1, 2005?

  • Federal tax lien filed May 15, 2005.
  • A secured debt properly perfected on February 10, 2005.
  • Trustee's administration cost filed September 30, 2005.
  • Employee wages due March 30, 2005.

A secured debt properly perfected on February 10, 2005. A secured creditor with a perfected interest will generally have top priority. After secured creditors are paid, the bankruptcy code sets forth an order of importance for unsecured creditors. The administrative expenses would come first among the unsecured claims, followed by the wages, and the tax lien would come last.

18

In a voluntary bankruptcy proceeding under Chapter 7 of the Federal Bankruptcy Code, which of the following claims, filed within 90 days of the filing for bankruptcy, will be paid first?

  • Unsecured federal taxes.
  • Utility bills up to $1,000.
  • Voluntary contributions to employee benefit plans.
  • Employee vacation and sick pay up to $2,000 per employee.

Employee vacation and sick pay up to $2,000 per employee. The bankruptcy establishes an order of priority for claims like these. After administrative expenses are paid, unpaid wages earned for 90 days prior to filing of the petition, up to $10,950 per employee, are paid; then, unpaid contributions to employee benefit plans, up to $10,950 per employee, are paid; then, taxes are paid; lastly, utility bills with the general creditors are paid.

19

Distribution Priorities

  1. Secured creditors
  2. Claims for child support and alimony
  3. Administration costs (attorney's fees and cpa fees, etc. related to the bankruptcy procedings.  
  4. Employee wages (not officers)
    1. 12,475 max
    2. 3 months preceding petition
  5. Contributions to employee benefit plans
    1. 12,475 max
    2. 6 months preceding petition
  6. Storing grain
  7. Consumer deposits
  8. Taxes
  9. Unsecured creditors

20

Under Chapter 7 of the Federal Bankruptcy Code, what affect does a bankruptcy discharge have on a judgment creditor when there is no bankruptcy estate?

  • The judgment creditor's claim is non-dischargeable.
  • The judgment creditor retains a statutory lien against the debtor.
  • The debtor is relieved of any personal liability to the judgment creditor.
  • The debtor is required to pay a liquidated amount to vacate the judgment.

The debtor is relieved of any personal liability to the judgment creditor. Unless the debtor has been denied a discharge decree owing either to an act of the debtor (such as fraud, intentional concealment of assets, and the like), or where, by statute, the debt is not discharged (such as in the case of unpaid taxes), the discharge decree releases the debtor from personal liability for debts owed to his or her creditors.

A judgment creditor's debt is dischargeable and therefore is not on the statutory list of non-dischargeable debts.

21

Which of the following acts by a debtor could result in a bankruptcy court revoking the debtor's discharge?

  • I. Failure to list one creditor.
  • II. Failure to answer correctly material questions on the bankruptcy petition.

II Only...A discharge is usually final. It will be revoked only if later evidence suggests that the debtor acted fraudulently or intentionally misled the bankruptcy court. Failure to list one creditor is probably not a fraudulent action, particularly if there are many creditors. Failing to answer important questions honestly and accurately may well indicate fraud.

22

In general, which of the following debts will be discharged under the voluntary-liquidation provisions of Chapter 7 of the Federal Bankruptcy Code?

  • A debt incurred owing to the negligence of the debtor, arising before the filing of the bankruptcy petition.
  • Alimony payments owed to the debtor's spouse under a separation agreement entered into two years before the filing of the bankruptcy petition.
  • A debt incurred more than 90 days before the filing of the bankruptcy petition and not disclosed in the petition.
  • Income taxes due up to two years before the filing of the bankruptcy petition.

A debt incurred owing to the negligence of the debtor, arising before the filing of the bankruptcy petition. So long as the debt itself has arisen before the filing, it will usually be discharged if it is based on simple negligence. Note that debts arising involving intoxication are not discharged by a Chapter 7 proceeding.

23

A claim will not be discharged in a bankruptcy proceeding if it

  • Is brought by a secured creditor and remains unsatisfied after receipt of the proceeds from the disposition of the collateral.
  • Is for unintentional torts that resulted in bodily injury to the claimant.
  • Arises from an extension of credit based upon false representations.
  • Arises out of the breach of a contract by the debtor.

Arises from an extension of credit based upon false representations. Claims based on fraud or other intentional wrongdoing by the debtor will not be discharged. If a debtor commits fraud, that debtor cannot take advantage of the bankruptcy laws when it comes time to pay the defrauded party.

24

Chapter 7 of the Federal Bankruptcy Code will deny a debtor a discharge when the debtor

  • Makes a preferential transfer to a creditor.
  • Accidentally destroys information relevant to the bankruptcy proceeding.
  • Obtains a Chapter 7 discharge ten years previously.
  • Is a corporation or a partnership.

Is a corporation or a partnership. Corporations and partnerships may go through a Chapter 7 liquidation, but do not qualify for a general discharge from all remaining debts as natural persons do.

25

Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, which of the following statements applies to a person who has voluntarily filed for and received a discharge in bankruptcy?

  • The person will be discharged from all debts.
  • The person can obtain another voluntary discharge in bankruptcy under Chapter 7 after three years have elapsed from the date of the prior filing.
  • The person must surrender for distribution to the creditors amounts received as an inheritance, if the receipt occurs within 180 days after filing the bankruptcy petition.
  • The person is precluded from owning or operating a similar business for two years.

The person must surrender for distribution to the creditors amounts received as an inheritance, if the receipt occurs within 180 days after filing the bankruptcy petition. After Chapter 7 liquidation proceedings begin, all non-exempt property at the time of the filing of the petition of the debtor becomes part of the distribution to creditors. In addition, some interests, including inheritances acquired by the debtor within 180 days of filing a voluntary petition, become a part of the debtor's estate for distribution.

26

Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, a debtor will be denied a discharge in bankruptcy if the debtor

  • Fails to list a creditor.
  • Owes alimony and child support payments.
  • Cannot pay administration expenses.
  • Refuses satisfactorily to explain a loss of assets.

Refuses satisfactorily to explain a loss of assets. Generally, a bankrupt debtor, at the end of bankruptcy proceedings, will receive a discharge decree. Unless the debtor has committed an act such as fraud, intentional concealment of assets, refusal to explain the loss of assets, and the like, is a partnership or corporation, or the debtor has received a discharge decree within eight years of the current filing petition, the discharge decree will be granted. Here, the debtor has committed an act, has refused satisfactorily to explain a loss of assets, and as such will be denied a discharge decree in bankruptcy.

27

The trustee in bankruptcy of a landlord-debtor under a Chapter 7 liquidation

  • Must be elected by the creditors immediately after a bankruptcy petition is filed.
  • May not be appointed by the court after the order for relief has been entered.
  • Must reject the executory contracts of the debtor.
  • May assign the leases of the debtor.

May assign the leases of the debtor. The trustee may assign the leases of the landlord-debtor if such action is considered to be in the best interest of the debtor’s estate. The trustee’s duty is to acquire as many assets as possible for distribution to the creditors who filed claims in the bankruptcy proceeding.

Trustee must within 60 days of the order for relief assume or reject any executory contract, including leases, made by the debtor

  1. Any not assumed are deemed rejected
  2. Trustee must perform all obligations on lease of nonresidential property until lease is either assumed or rejected
  3. Rejection of a contract is a breach of contract and injured party may become an unsecured creditor
  4. Trustee may assign or retain leases if good for bankrupt’s estate and if allowed under lease and state law
  5. Rejection or assumption of lease is subject to court approval

28

If a secured party’s claim exceeds the value of the collateral of a bankrupt, he will be paid the total amount realized from the sale of the security and will

  1. Not have any claim for the balance.
  2. Become a general creditor for the balance.
  3. Retain a secured creditor status for the balance.
  4. Be paid the balance only after all general creditors are paid.

Become a general creditor for the balance. A secured creditor has a security interest in the personal property of the debtor which is acting as collateral for the debt. In a bankruptcy proceeding, there is an order of priorities concerning distribution of the debtor’s estate. Secured creditors are given first priority in the sense that property subject to a valid security interest is not part of the estate for distribution purposes but belongs to the secured creditor to the extent of his security interest. The secured party can either take the property or its cash equivalent. If the value of the property is insufficient to satisfy the claim, the secured creditor becomes a general creditor for the balance.

29

A discharge of a bankrupt debtor is a release from all debts except those that are not dischargeable.  However, certain acts can bar a general discharge.  Which of the following acts of the debtor will result in a bar to a general discharge? 

I.Failing to explain satisfactorily a loss of assets that should have ended up in the estate. 

II.Making false claims against the estate. 

III.Taking out bankruptcy 3 years earlier.

  1. II only.
  2. III only.
  3. II and III only.
  4. I, II, and III.

I, II, and III. Any of the three acts listed will bar a general discharge. In the case of the third act, the rule bars a general discharge if the debtor took out bankruptcy within the previous 8 years.

30

Branson Corporation voluntarily filed a petition in bankruptcy on January 2 of the current year.  Branson owes the following debts:

  1. $500 to an appraiser for help in appraising the assets in the bankruptcy estate.
  2. Wages of $3,000 to an employee for December of the previous year just concluded.
  3. Timely claims of general, unsecured creditors of $30,000.
  4. State and federal taxes of $10,000 owed.

What is the priority from highest to lowest, of these claims in the bankruptcy proceedings?

1, 2, 4, 3

The liability to the appraiser is an administration cost and, therefore, receives the highest priority. Of those listed, the salary owed to the employee is the next highest because it was accrued within the previous 90 days before the filing of the petition and was for no more than $12.475. The state and federal taxes owed receive a low priority but still higher than the claims of the general creditors.

Order of Priority is...

  1. Secured Creditors
  2. Unsecured Creditors
    1. Domestic support obligations (alimony, child support, etc.)
    2. Administration costs - Includes fees to accountants, attorneys, trustees, and appraisers as well as expenses incurred only in recovering, preserving, selling, or discovering property that should be included in debtor’s estate
    3. Claims arising in ordinary course of debtor's business after involuntary bankruptcy petition is filed but before the order for relief is entered (gap creditors)
    4. Wages, salaries, and commissions, including vacation, severance, and sick leave owing to bankrupt's Employees up to $12,475 per employee earned within 180 days before the petition in bankruptcy was filed (or cessation of business, whichever occurred first)
      1. Any amount earned in excess of $12,475 is treated as a general claim as explained in (11) below
      2. This priority does not include officers’ salaries
    5. Contributions to employee benefit plans within the prior 180 days
    6. Claims on storage of grain or fish up to $6,150 for each individual
    7. Consumer deposits for undelivered goods or services limited to $2,775 per individual
    8. Taxes (federal, state, and local
    9. Obligations to an insured bank
    10. Debts arising from motor vehicle accidents while under the influence of drugs or alcohol
    11. General (unsecured) creditors that filed timely proofs of claims

 

31

If a secured party’s claim exceeds the value of the collateral of a bankrupt, he will be paid the total amount realized from the sale of the security and will

  1. Not have any claim for the balance.
  2. Become a general creditor for the balance.
  3. Retain a secured creditor status for the balance.
  4. Be paid the balance only after all general creditors are paid.

Become a general creditor for the balance.

A secured creditor has a security interest in the personal property of the debtor which is acting as collateral for the debt. In a bankruptcy proceeding, there is an order of priorities concerning distribution of the debtor’s estate. Secured creditors are given first priority in the sense that property subject to a valid security interest is not part of the estate for distribution purposes but belongs to the secured creditor to the extent of his security interest. The secured party can either take the property or its cash equivalent. If the value of the property is insufficient to satisfy the claim, the secured creditor becomes a general creditor for the balance.

32

One of the elements necessary to establish that a preferential transfer has been made under the Bankruptcy Code by the debtor to a creditor is that the

  1. Debtor was insolvent at the time of the transfer.
  2. Creditor was an insider and the transfer occurred within 90 days of the filing of the bankruptcy petition.
  3. Transfer was in fact a contemporaneous exchange for new value given to the debtor.
  4. Transfer was made by the debtor with actual intent to hinder, delay, or defraud other creditors.

Debtor was insolvent at the time of the transfer.

Under the Bankruptcy Act, one of the elements which must be established in proving that a preferential transfer was made is that the debtor was insolvent at the time of the transfer. The Bankruptcy Act presumes that the debtor is insolvent during the 90 days prior to the date the petition was filed.

A preferential transfer can be made to a general creditor, as well as an inside creditor. If the transfer is made to a creditor who is an insider, the transfer may be voided by the trustee if it occurred within 12 months prior to the filing of the petition.

Trustee may also set aside preferential transfers of nonexempt property to a general creditor made within the previous ninety days prior to the filing of the petition

33

The Bankruptcy Code provides that a debtor is entitled to claim as exempt property the right to receive?

  1. Social security benefits
  2. Disability benefits

BOTH...under the Bankruptcy Code, the debtor has the right to receive any of the following payments as exempt property:

  1. a social security benefit, unemployment benefit,
  2. a veteran’s benefit,
  3. a disability, illness  
  4. alimony, support or separate maintenance to the extent reasonably necessary for the support of the debtor and any dependents of the debtor, and
  5. a payment under a stock bonus, pension, profit sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service to the extent reasonably necessary for the support of the debtor and any dependents of the debtor.

 

34

A claim will not be discharged in a bankruptcy proceeding if it

  1. Is brought by a secured creditor and remains unsatisfied after receipt of the proceeds from the disposition of the collateral.
  2. Is for unintentional torts that resulted in bodily injury to the claimant.
  3. Arises from an extension of credit based upon false representations.
  4. Arises out of the breach of a contract by the debtor.

Arises from an extension of credit based upon false representations. There are certain debts that are not dischargeable by bankruptcy. Included in these are liabilities that arose from intentionally obtaining property or money by false representations or fraud.

35

Debts not discharged in Bankruptcy

  1. Taxes within 3 years of filing bankruptcy petition
  2. Loans for payment of federal taxes
  3. Unscheduled debts unless creditor had actual notice of proceedings (i.e., where bankrupt failed to list creditor and debt)
  4. Alimony, separate maintenance, or child support
  5. Liability due to theft or embezzlement
  6. Debts arising from debtor’s fraud about his/her financial condition or fraud in connection with purchase or sale of securities.
  7. Willful and/or malicious injuries to a person or property of another (intentional torts)
  8. Congress amended Bankruptcy Code making it more difficult for student loans to be discharged in bankruptcy

36

Barkam is starting a new business, Barkham Enterprises, which is a sole proprietorship selling retail novelties. Barkam recently received a discharge in bankruptcy, but certain proved claims were unpaid because of lack of funds. Which of the following is still a valid claim against Barkham?

  1. The unpaid amounts owed to secured creditors who received less than the full amount after resorting to their security interest and receiving their bankruptcy dividend.
  2. The unpaid amounts owed to trade suppliers for goods purchased and sold by Barkam in the ordinary course of his prior business.
  3. A personal loan by his father made in an attempt to stave off bankruptcy.
  4. The unpaid amount of taxes due to the United States which became due and owing within 3 years preceding bankruptcy.

The unpaid amount of taxes due to the United States which became due and owing within 3 years preceding bankruptcy. Any unpaid amount of taxes due to the United States or to any state or subdivision thereof from within 3 years preceding bankruptcy is not discharged by the bankruptcy proceeding.

37

On May 1, year 2, 2 months after becoming insolvent, Quick Corp., an appliance wholesaler, filed a voluntary petition for bankruptcy under the provisions of Chapter 7 of the Federal Bankruptcy Code.  On October 15, year 1, Quick’s board of directors had authorized and paid Erly $50,000 to repay Erly’s April 1, year 1, loan to the corporation.  Erly is a sibling of Quick’s president.  On March 15, year 2, Quick paid Kray $100,000 for inventory delivered that day.

Quick’s payment to Kray would?

  1. Not be voidable, because it was a contemporaneous exchange for new value.
  2. Not be voidable, unless Kray knew about Quick’s insolvency.
  3. Be voidable, because it was made within 90 days of the bankruptcy filing.
  4. Be voidable, because it enabled Kray to receive more than it otherwise would receive from the bankruptcy estate.

Not be voidable, because it was a contemporaneous exchange for new value.

An important exception to the trustee’s power to avoid preferential transfers is a contemporaneous exchange between the debtor and the creditor whereby the debtor receives new value. Such is the case in Quick’s payment to Kray for newly delivered inventory.

38

In a bankruptcy proceeding, the trustee

  1. Must be an attorney admitted to practice in the federal district in which the bankrupt is located.
  2. Will receive a fee based upon the time and fair value of the services rendered, regardless of the size of the estate.
  3. May not have had any dealings with the bankrupt within the past year.
  4. Is the representative of the bankrupt’s estate and as such has the capacity to sue and be sued on its behalf.

Is the representative of the bankrupt’s estate and as such has the capacity to sue and be sued on its behalf.

Trustee—the representative of the estate

  1. Trustee has right to receive compensation for services rendered based on value of those services (rather than only on size of estate)
  2. Duties—to collect, liquidate, and distribute the estate, keeping accurate records of all transactions
  3. Trustee represents estate of bankrupt (debtor)

Trustee may be sued or sue on behalf of estate

39

Under the federal Bankruptcy Code, which of the following rights or powers does a trustee in bankruptcy not have?

  1. The power to prevail against a creditor with an unperfected security interest.
  2. The power to require persons holding the debtor’s property at the time the bankruptcy petition is filed to deliver the property to the trustee.
  3. The right to use any grounds available to the debtor to obtain the return of the debtor’s property.
  4. The right to avoid any statutory liens against the debtor’s property that were effective before the bankruptcy petition was filed.

The right to avoid any statutory liens against the debtor’s property that were effective before the bankruptcy petition was filed.

Under the federal Bankruptcy Code, a trustee in bankruptcy may set aside statutory liens that become effective when the bankruptcy petition is filed but may not set aside those that were effective before the bankruptcy petition was filed. Therefore, this answer is correct.

  1. Trustee may take any legal action necessary to carry out duties
  2. Trustee, with court approval, may employ professionals (e.g., accountants and lawyers) to assist trustee in carrying out duties that require professional expertise
  3. Trustee must within sixty days of the order for relief assume or reject any executory contract, including leases, made by the debtor
  4. Trustee may set aside liens (those which arise automatically under law) if lien
    1. Becomes effective when bankruptcy petition is filed or when debtor becomes insolvent
    2. Is not enforceable against a bona fide purchaser when the petition is filed
    3. In the case of a security interest, is not perfected before filing of bankruptcy petition
  5. Trustee may set aside transfers made within one year prior to the filing of the bankruptcy petition if
    1. The transfer was made with intent to hinder, delay, or defraud any creditor.  The debtor need not be insolvent at time of transfer.
    2. Debtor received less than a reasonably equivalent value in exchange for such transfer or obligation and the debtor was insolvent at the time, or became insolvent as a result of the transfer
  6. Trustee may also set aside preferential transfers of nonexempt property to a creditor made within the previous ninety days while insolvent in the “bankruptcy sense”
    1. Preferential transfers are those made for preexisting debts that enable the creditor to receive more than s/he would have otherwise under a Chapter 7 liquidation proceeding
      1. Includes a security interest given by debtor to secure antecedent debt
        EXAMPLE:  Debtor paid off a loan, before the loan was due, to BB Bank sixty days before Debtor filed a bankruptcy petition. This is a preferential transfer. 

40

As an alternative to bankruptcy liquidation, a business may reorganize under Chapter 11 of the Bankruptcy Code.  Such a reorganization

  1. Requires the appointment of a trustee to administer the debtor organization.
  2. May be commenced by filing either a voluntary or involuntary petition.
  3. Never requires the appointment of a creditors’ committee.
  4. May not be confirmed unless all creditors accept the plan.

May be commenced by filing either a voluntary or involuntary petition.

A business reorganization under Chapter 11 of the Bankruptcy Code is an alternative to a straight bankruptcy. It may be commenced by either the debtor filing a voluntary petition or the creditors filing an involuntary petition.

Goal is to keep financially troubled firm in business.

  • It is an alternative to liquidation under Chapter 7 (straight bankruptcy)
  • In general, allows debtor to keep assets of business

Can be initiated by debtor (voluntary) or creditors (involuntary)

Creditor’s committee is appointed after the order for relief is entered.  This committee essentially functions as the bankruptcy trustee.

A reorganization plan is required.

41

On May 5, Bold obtained a $90,000 judgment in a malpractice action against Aker, a physician. On June 2, 2009, Aker obtained a $75,000 loan from Tint Finance Co. by knowingly making certain false representations to Tint.  On July 7, Aker filed a voluntary petition in bankruptcy under the liquidation provisions of the Bankruptcy Code.  Both Bold and Tint filed claims in Aker’s bankruptcy proceeding.  Assets in Aker’s bankruptcy estate are exempt.  Bold’s claim

  1. Will be exempt from Aker’s discharge in bankruptcy.
  2. Will cause Aker to be denied a discharge in bankruptcy.
  3. Will be set aside as a preference.
  4. Will be discharged in Aker’s bankruptcy proceeding.

Will be discharged in Aker’s bankruptcy proceeding.

When a debtor is granted a discharge in a bankruptcy proceeding, most of the debtor’s obligations are discharged. A debt arising from the negligence of the debtor is a dischargeable debt. Therefore, Bold’s claim will be discharged. If Bold’s claim was based on willful or malicious misconduct of the debtor (such as Tint's claim), then the debt would not be discharged.

42

Which of the following is correct with respect to an involuntary bankruptcy proceeding under the liquidation provisions of the Bankruptcy Code?

  1. It may be commenced against any debtor who is insolvent.
  2. The debtor may regain possession of property in the possession of an interim trustee if the debtor files a bond.
  3. The petitioners must automatically file a bond to indemnify the debtor for any loss caused by the filing of the petition.
  4. A trustee must be elected by the creditors immediately after the court orders relief against the debtor.

The debtor may regain possession of property in the possession of an interim trustee if the debtor files a court approved bond.

EXAMPLE:  Mortgage foreclosure by savings and loan will be suspended against debtor.

43

Hard Times, Inc., is insolvent. Its liabilities exceed its assets by $13 million.  Hard Times is owned by its president, Waters, and members of his family.  Waters, whose assets are estimated at less than a million dollars, guaranteed the loans of the corporation.  A consortium of banks is the principal creditor of Hard Times, having loaned it $8 million, the bulk of which is unsecured.  The banks decided to seek reorganization of Hard Times and Waters has agreed to cooperate.  Regarding the proposed reorganization

  1. Waters’ cooperation is necessary since he must sign the petition for a reorganization.
  2. If a petition in bankruptcy is filed against Hard Times, Waters will also have his personal bankruptcy status resolved and relief granted.
  3. Only a duly constituted creditors committee may file a plan of reorganization of Hard Times.
  4. Hard Times will remain in possession of its business unless a request is made to the court for the appointment of a trustee.

Hard Times will remain in possession of its business unless a request is made to the court for the appointment of a trustee.

Under a Chapter 11 reorganization, a debtor is allowed to remain in possession of its business unless the court upon request by a party in interest appoints a trustee to take over management of the debtor’s business. The court will approve such a request when it appears gross mismanagement of the business has occurred, or that the takeover by a trustee would be in the best interest of the debtor’s estate.

44

The federal bankruptcy act contains several important terms.  One such term is "insider." The term is used in connection with preferences and preferential transfers.  Which among the following is not an "insider"?

  1. A secured creditor having a security interest in at least 25% or more of the debtor’s property.
  2. A partnership in which the debtor is a general partner.
  3. A corporation of which the debtor is a director.
  4. A close blood relative of the debtor.

A secured creditor having a security interest in at least 25% or more of the debtor’s property.

  • Preferential transfers made to insiders within the previous 12 months may be set aside.
  • Insiders are
    1. close blood relatives,
    2. officers,
    3. directors,
    4. controlling stockholders of corporations, or
    5. general partners of partnerships

45

Under Chapter 11 of the Federal Bankruptcy Code, which of the following actions is necessary before the court may confirm a reorganization plan?

  1. Provision for full payment of administration expenses.
  2. Acceptance of the plan by all classes of claimants.
  3. Preparation of a contingent plan of liquidation.
  4. Appointment of a trustee.

Provision for full payment of administration expenses.

Under Chapter 11 of the Federal Bankruptcy Code, a business may be allowed to continue its operations and keep its business assets. The court-supervised reorganization plan provides for payment of all or part of the debts over an extended period. The claims are divided into classes of similar claims so that they can be treated equally. For the court to confirm the reorganization plan, it must provide for full payment of administration expenses.

46

The filing of an involuntary petition in bankruptcy

  1. Allows creditors to continue their collection actions against the debtor while the bankruptcy action is pending.
  2. Terminates liens associated with exempt property.
  3. Stops the enforcement of a judgment lien against property in the bankruptcy estate.
  4. Terminates all security interests in property in the bankruptcy estate.

Stops the enforcement of a judgment lien against property in the bankruptcy estate.

The filing of an involuntary petition in bankruptcy stops the enforcement of most collections of debts and legal proceedings against the debtor’s estate. Thus, the enforcement of judgment liens against property in the bankruptcy estate would be stopped by the filing of the involuntary petition.

47

In general, which of the following debts will be discharged under the voluntary liquidation provisions of the Bankruptcy Code?

  1. Debts incurred after the order for relief but before the debtor receives a discharge in bankruptcy.
  2. Income taxes due as the result of filing a fraudulent return 7 years prior to the filing of the bankruptcy petition.
  3. A debt arising before the filing of the bankruptcy petition due to the debtor’s negligence.
  4. Alimony payments owed to the debtor’s spouse under a separation agreement entered into prior to the filing of the bankruptcy question.

A debt arising before the filing of the bankruptcy petition due to the debtor’s negligence.

Under the voluntary liquidation provisions of the Bankruptcy Code, a debt arising before the filing of the bankruptcy petition due to the debtor’s negligence will be discharged in the proceedings. Note that had the debt been due to the debtor’s willful and intentional torts, it would not be discharged in bankruptcy.

48

Jones, CPA, prepared Smith’s 2012 federal income tax return and appropriately signed the preparer’s declaration. Several months later Jones learned that Smith improperly altered several figures before mailing the tax return to the IRS. Jones should communicate disapproval of this action to Smith and

  1. Take no further action with respect to the 2012 tax return but consider the implications of Smith’s actions upon any future relationship.
  2. Inform the IRS of the unauthorized alteration.
  3. File an amended tax return.
  4. Refund any fee collected, return all relevant documents, and refuse any further association with Smith.

Take no further action with respect to the 2012 tax return but consider the implications of Smith’s actions upon any future relationship.

Professional standards require the CPA to consider the implications of the client’s action on future relationships with the client.

49

Various creditors are seeking payment for debts of a corporation that has been forced into bankruptcy.  Show from highest to lowest the priorities of the following debts of the corporation.

  • I.Legal fees owed to a law firm for services not connected with the bankruptcy.
  • II.Fees owed appraisers who aided in the sale of the corporation’s assets for the bankruptcy proceedings.
  • III.State taxes the corporation owes for the previous year.
  1. I, III, II.
  2. II, I, III.
  3. II, III, I.
  4. III, II, I.

  1. Fees owed appraisers who aided in the sale of the corporation’s assets for the bankruptcy proceedings.
  2. State taxes the corporation owes for the previous year.
  3. Legal fees owed to a law firm for services not connected with the bankruptcy.

The fees owed the appraisers are administrative costs and receive the highest priority. The legal costs unconnected to the bankruptcy are not administration costs. The law firm therefore is a general creditor and gets the lowest priority.

50

On February 28, Master, Inc. had total assets with a fair market value of $1,200,000 and total liabilities of $990,000. On January 15, Master made a monthly installment note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note.  On March 15, Master voluntarily filed a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code.  One year later, the equipment was sold for less than the balance due on the note to Acme.
If Master’s voluntary petition is filed properly,

  1. Master will be entitled to conduct its business as a debtor-in-possession unless the court appoints a trustee.
  2. A trustee must be appointed by the creditors.
  3. Lawsuits by Master’s creditors will be stayed by the Federal Bankruptcy Code.
  4. The unsecured creditors must elect a creditors’ committee of three to eleven members to consult with the trustee.

Lawsuits by Master’s creditors will be stayed by the Federal Bankruptcy Code.

51

A voluntary bankruptcy proceeding is available to

  1. All debtors provided they are insolvent.
  2. Debtors only if the overwhelming preponderance of creditors have not petitioned for and obtained a receivership pursuant to state law.
  3. Corporations only if a reorganization has been attempted and failed.
  4. Consumer debtors who make less than the dollar limits set forth in the Bankruptcy Code.

Consumer debtors who make less than the dollar limits set forth in the Bankruptcy Code.

1.Voluntary bankruptcy petition is a formal request by debtor for an order of relief

  • a.Petition is filed with court along with list of debtor’s assets and liabilities
  • b.Debtor is automatically given an order of relief upon filing of petition
  • c.The Bankruptcy Abuse and Protection Act of 2005 imposes criteria that a consumer debtor must meet to prove that the debtor is not abusing the Bankruptcy Code. In other words, the law is trying to assure that debtors with the ability to repay their debts are not declaring bankruptcy.
    • (1)The law presumes abuse unless the debtor's monthly income falls below certain dollar limits. The law does permit the deduction of monthly living expenses when calculating monthly income.
    • (2)Other special circumstances such as a medical conditions or service in the armed forces will be considered.
    • (3)If the debtor's income exceeds the statutory amount and the debtor is unable to remove the presumption of abuse, the debtor may proceed under Chapter 13 instead of Chapter 7.
  • d.Petition may be filed by husband and wife jointly

 2.There is no minimum number of creditors required to file for bankruptcy

52

A debtor will be denied a discharge in bankruptcy if the debtor

  1. Failed to timely list a portion of his debts.
  2. Unjustifiably failed to preserve his books and records which could have been used to ascertain the debtor’s financial condition.
  3. Has negligently made preferential transfers to favored creditors within 90 days of the filing of the bankruptcy petition.
  4. Has committed several willful and malicious acts which resulted in bodily injury to others.

Unjustifiably failed to preserve his books and records which could have been used to ascertain the debtor’s financial condition.

A debtor will be denied a general discharge if that debtor destroyed, falsified, concealed, or failed to keep books of account or record unless such act was justified under the circumstances.

53

Chapter 11 of the Bankruptcy Reform Act of 1978 deals with reorganizations.  This Chapter

  1. Is exclusively available to corporations.
  2. Permits the debtor-in-possession to continue to operate the business in the same manner as a Chapter 11 trustee.
  3. Provides for filing of voluntary petitions but prohibits the filing of involuntary petitions.
  4. Provides separate procedures for corporations with publicly held securities.

Permits the debtor-in-possession to continue to operate the business in the same manner as a Chapter 11 trustee.

Chapter 11 of the Bankruptcy Reform Act of 1978 permits the debtor-in-possession to continue to operate the business in the same manner as a Chapter 11 trustee. However, the creditors’ committee may request the appointment of a trustee to displace the debtor-in-possession.

54

A bankrupt who has voluntarily filed for and received a discharge in bankruptcy under the liquidation provisions (Ch. 7)

  1. Is precluded from owning or operating a similar business for 2 years.
  2. Must surrender for distribution to the creditors amounts received as an inheritance if the receipt occurs within 180 days after filing of the petition.
  3. Will receive a discharge of any and all debt owed by him as long as he has not committed a bankruptcy offense.
  4. Can obtain another voluntary discharge in bankruptcy under Ch. 7 after 5 years have elapsed from the date of the prior filing.

Must surrender for distribution to the creditors amounts received as an inheritance if the receipt occurs within 180 days after filing of the petition.

A bankrupt’s estate consists of property owned at the time of the filing of the petition and property received by way of inheritance bequest, devise, property settlement with spouse, divorce decree, or life insurance within 6 months after the filing of the petition. An inheritance received 180 days after the filing of the petition must be surrendered for distribution.

55

On April 1, Roe borrowed $100,000 from Jet to pay Roe’s business expenses.  On June 15, Roe gave Jet a signed security agreement and financing statement covering Roe’s inventory.  Jet immediately filed the financing statement.  On July 1, Roe filed for bankruptcy.  Under the federal Bankruptcy Code, can Roe’s trustee in bankruptcy set aside Jet’s security interest in Roe’s inventory?

  1. Yes, because a security agreement may only cover goods actually purchased with the borrowed funds.
  2. Yes, because Roe giving the security interest to Jet created a voidable preference.
  3. No, because the security interest was perfected before Roe filed for bankruptcy.
  4. No, because the loan proceeds were used for Roe’s business.

Yes, because Roe giving the security interest to Jet created a voidable preference.

Preferential transfers include those made within the previous ninety days while insolvent and include those made for antecedent debts including a security interest given by a debtor to secure antecedent debts.

56

Peters Co. repairs computers.  On February 9, Stark Electronics Corp. sold Peters a circuit tester on credit.  Peters executed an installment note for the purchase price, a security agreement covering the tester, and a financing statement that Stark filed on February 11.  On April 13, creditors other than Stark filed an involuntary petition in bankruptcy against Peters. What is Stark’s status in Peters’ bankruptcy?

  1. Stark will be treated as an unsecured creditor because Stark did not join in the filing against Peters.
  2. Stark’s security interest constitutes a voidable preference because the financing statement was not filed until February 11.
  3. Stark’s security interest constitutes a voidable preference because the financing statement was filed within 90 days before the bankruptcy proceeding was filed.
  4. Stark is a secured creditor and can assert a claim to the circuit tester that will be superior to the claims of Peters’ other creditors.

Stark is a secured creditor and can assert a claim to the circuit tester that will be superior to the claims of Peters’ other creditors.

Stark is a secured creditor who perfected his security interest by filing on February 11. His claim on the collateral (i.e., the circuit tester, is superior to claims of Peters’ other creditors).

57

Haplow engaged Turnbow as his attorney when threatened by several creditors with a bankruptcy proceeding. Haplow’s assets consisted of $85,000 and his debts were $125,000. A petition was subsequently filed and was uncontested.  Several of the creditors are concerned that the suspected large legal fees charged by Turnbow will diminish the size of the distributable estate.  What are the rules of limitation which apply to such fees?

  1. None, since it is within the attorney-client privileged relationship.
  2. The fee is presumptively valid as long as arrived at in an arm’s-length negotiation.
  3. Turnbow must file with the court a statement of compensation paid or agreed to for review as to its reasonableness.
  4. The trustee must approve the fee.

Turnbow must file with the court a statement of compensation paid or agreed to for review as to its reasonableness.

According to the Rules of Bankruptcy Procedure, it is necessary to file a proof of claims against the debtor’s estate. The filing must be timely (within a 6-month period) or the claim will be barred. A claim that is filed on time is given prima facie validity and is approved unless there is an objection by one of the creditors. The filing would include a statement of compensation paid or agreed.

58

An involuntary petition in bankruptcy

  1. Will be denied if a majority of creditors in amount and in number have agreed to a common law composition agreement.
  2. Can be filed by creditors only once in a 7-year period.
  3. May be successfully opposed by the debtor by proof that the debtor is solvent in the bankruptcy sense.
  4. If not contested will result in the entry of an order for relief by the bankruptcy judge.

If not contested will result in the entry of an order for relief by the bankruptcy judge.

An involuntary petition in bankruptcy, if not contested, will automatically result in the entry of an order for relief by the bankruptcy court. Only if the petition is contested will the creditor(s) be required to prove either that the debtor is not paying her/his debts as they mature, or that during the 120 days preceding the filing of a petition, a custodian was appointed or took possession of the debtor’s property.

59

Dark Corp. is a general creditor of Blue.  Blue filed a petition in bankruptcy under the liquidation provisions of the Bankruptcy Code. Dark wishes to have the bankruptcy court either deny Blue a general discharge or not have its debt discharged.  The discharge will be granted and it will include Dark’s debt even if

  1. Dark’s debt is unscheduled.
  2. Dark was a secured creditor which was not fully satisfied from the proceeds obtained upon disposition of the collateral.
  3. Blue has unjustifiably failed to preserve the records from which Blue’s financial condition might be ascertained.
  4. Blue had filed for and received a previous discharge in bankruptcy under the liquidation provisions within 8 years of the filing of the present petition.

Dark was a secured creditor which was not fully satisfied from the proceeds obtained upon disposition of the collateral.

The fact that the debt of a secured party was not fully satisfied from the proceeds obtained from disposition of the collateral will not result in a denial of a general discharge, nor will the remaining portion of the secured debt be nondischargeable. In such situations the secured party has the same priority as a general unsecured creditor (lowest priority) concerning the unpaid portion of the debt.

60

Which of the following statements is correct under the Reorganization Chapter of the Bankruptcy Code if the debtor remains in possession of its business?

  • I.The debtor has the right to be compensated in the same manner as a trustee. 
  • II.The debtor has the right to retain its own accountant to represent it despite the debtor’s employment of that accountant prior to the commencement of the Reorganization proceeding.

2 ONLY.

Under the Reorganization Chapter of the Bankruptcy Code, a person is not disqualified for employment by a debtor because of such person’s employment by the debtor before the commencement of the Reorganization proceedings. Therefore, the debtor does have the right to retain its own accountant to represent it. The Code also states that although the debtor in possession does have many of the same rights as a trustee, it does not have the right to be compensated in the same manner.

61

Darla, Jack, and Sam have formed a partnership with each agreeing to contribute $100,000.  Jack and Sam each contributed $100,000 cash.  Darla contributed $75,000 cash and agreed to pay an additional $25,000 two years later. After one year of operations the partnership is insolvent.  The liabilities and FMV of the assets of the partnership are as follows:

  • Assets:
    • Cash $40,000
    • Trade accounts receivable $35,000
    • Receivable from Darla $25,000
    • Equipment $100,000
    • $200,000
  • Liabilities: 
    • Trade accounts payable $410,000

Both Jack and Sam are personally insolvent.  Darla has a net worth of $750,000.
If Darla is a limited partner, what is her maximum potential liability?

  1. $0
  2. $25,000
  3. $210,000
  4. $235,000

$25,000

Darla, as a limited partner, is not liable for debts of the partnership beyond the amount of her capital contribution. However, she is still liable for the $25,000 of her capital contribution that she has not yet paid.

62

On June 5, year 1, Green rented equipment under a 5-year lease.  On March 8, year 2, Green was involuntarily petitioned into bankruptcy under the liquidation provisions of the Bankruptcy Code, and a trustee was appointed.  The fair market value of the equipment exceeds the balance of the lease payments due.  The trustee

  1. Must assume the equipment lease because its term exceeds 1 year.
  2. Must assume and subsequently assign the equipment lease.
  3. May elect not to assume the equipment lease.
  4. May not reject the equipment lease because the fair market value of the equipment exceeds the balance of the lease payments due.

May elect not to assume the equipment lease.

Under the provisions of the Bankruptcy Code, the trustee in bankruptcy is given the option, subject to court approval, to (1) assume and perform the unexpired lease, (2) assume and assign the unexpired lease to a third party, or (3) reject the unexpired lease. In a liquidation case, the trustee must act to assume within 60 days after the order for relief is entered. If not assumed within this time, the lease is deemed rejected. Thus, the trustee may elect to not assume the equipment lease.

63

Which of the following unsecured debts of $500 each would have the highest relative priority in the distribution of a bankruptcy estate in a liquidation proceeding?

  1. Tax claims of state and municipal governmental units.
  2. Liabilities to employee benefit plans arising from services rendered during the month preceding the filing of the petition.
  3. Claims owed to customers who gave deposits for the purchase of undelivered consumer goods.
  4. Wages earned by employees during the month preceding the filing of the petition.

Wages earned by employees during the month preceding the filing of the petition.

The Bankruptcy Reform Act establishes the priorities for the satisfaction of claims against the debtor in a bankruptcy proceeding. Of those claims listed in this question, the one that has the highest priority would be the employees’ wages since they were earned within 90 days before the filing of the petition in bankruptcy and are less than the $12,475 maximum allowed per employee.

64

Skipper was for several years the principal stockholder, director, and chief executive officer of the Canarsie Grocery Corporation. Canarsie had financial difficulties and an order of relief was filed against it, and its debts subsequently discharged in Bankruptcy.  Several creditors are seeking to hold Skipper personally liable as a result of his stock ownership and as a result of his being an officer-director.  Skipper in turn filed with the bankruptcy judge a claim for $1,400 salary due him.  Which of the following is correct?

  1. Skipper’s salary claim will be allowed and he will be entitled to a priority.
  2. Skipper has no personal liability to the creditors as long as Canarsie is recognized as a separate legal entity.
  3. Skipper cannot personally file a petition in bankruptcy for 8 years.
  4. Skipper is personally liable to the creditors for Canarsie’s losses.

Skipper has no personal liability to the creditors as long as Canarsie is recognized as a separate legal entity.

A corporation is considered a separate legal entity from its owners (the shareholders). Generally, the shareholders are not personally liable for the debts of the corporation. This is normally true even concerning a principal stockholder who is a director and chief executive officer of the corporation. However, if the purpose of incorporation is to defraud the creditors, then the courts will "pierce the corporate veil" and hold the shareholders personally liable.

65

Wilk owes a total of $50,000 to eight unsecured creditors and one fully secured creditor. Rusk is one of the unsecured creditors and is owed $17,800. Rusk has filed a petition against Wilk under the liquidation provisions of the Bankruptcy Code. Wilk has been unable to pay Wilk’s debts as they become due and Wilk’s liabilities exceed Wilk’s assets. Wilk has filed the papers that are required to oppose the bankruptcy petition. Which of the following statements is correct?

  1. The petition will be granted because Wilk is unable to pay Wilk’s debts as they become due.
  2. The petition will be granted because Wilk’s liabilities exceed Wilk’s assets.
  3. The petition will be dismissed because three unsecured creditors must join in the filing of the petition.
  4. The petition will be dismissed because the secured creditor failed to join in the filing of the petition.

The petition will be granted because Wilk is unable to pay Wilk’s debts as they become due.

Under an involuntary bankruptcy petition, if there are fewer than 12 creditors, a single creditor may file the petition as long as his/her claim is $15,325 in excess of any security s/he may hold. If the involuntary petition in bankruptcy is not contested, it will automatically result in the entry of an order for relief by the bankruptcy court. However, if the petition is contested, the creditor(s) are required to prove either that the debtor is not paying his/her debts as they mature, or that during the 120 days preceding the filing of a petition, a custodian took possession of the debtor’s property. In this situation, there are fewer than 12 creditors which enables Rusk, as an unsecured creditor owed more than $15,325, to file a bankruptcy petition against Wilk. Even though Wilk has contested this bankruptcy petition, it will be granted since Rusk can prove Wilk is unable to pay Wilk’s debts as they mature.