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Flashcards in Debtor & Creditor Relationships Deck (138):

What is the main structure of the legislation concerning bankruptcy?

The Federal Bankruptcy Code supersedes almost all state laws regarding bankruptcy (especially concerning insolvency), but some state laws apply (e.g. real estate law)


How do state and federal bankruptcy law generally differ regarding creditors’ rights?

State law emphasizes creditors’ rights to improve their claims over other creditors, while federal law emphasizes equality among creditors within the same class


What is the BAPCPA?

Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 -- limits the public disclosure of personal information in bankruptcy cases


What are the five types of bankruptcy proceedings?

Correspond to five chapters in the Federal Bankruptcy Code: Chapters 7, 9, 11, 12, and 13

9 and 12 are not as relevant to the CPA exam


What is Chapter 7 bankruptcy?

Straight bankruptcy/liquidation

Purpose is to liquidate all the debtor’s property (except for exempt property), sell it, and give the proceeds to creditors


What is Chapter 9 bankruptcy?

Sets out procedures for municipalities to work out debt repayment plans with creditors


What is Chapter 11 bankruptcy?

Seeks to reorganize a business’s finances to pay back creditors and benefit stockholders

Can be used by individuals rather than businesses, but not usually


How can a business file a shortened Chapter 11 bankruptcy plan?

If its debts are under $2 million


Can creditors for a Chapter 11 debtor offer a reorganization plan?

Yes, but only if the debtor has not proposed a plan after 18 months of filing for bankruptcy


What is Chapter 13 bankruptcy?

Reorganization for individuals -- does not liquidate property except with debtor’s consent


What is Chapter 12 bankruptcy?

A special form of bankruptcy for family farmers and fishers that makes their debt situations easier to bear


In bankruptcy law, who can be a debtor?

A municipality or a person

A person can be an individual, corporation, or partnership -- but not a government entity, trust, or decedent’s estate


Can just any person be a debtor?

Under federal law, if a debtor is a person, he/it must reside in the U.S. or have a residence, business, or property in the U.S.


Who cannot qualify as a Chapter 7 debtor?

(a) railroad
(b) insurance company
(c) bank or lending institution


Who qualifies as a Chapter 13 debtor?

As of 2013, an individual with regular income, under $336,900 in unsecured debts, and under $1,010,650 in secured debts


What is a court required to do for a Chapter 11 bankruptcy?

Appoint a creditors’ committee from the debtor’s unsecured creditors


For which types of bankruptcy is a court required to appoint a trustee?

Chapters 7 and 13

A trustee can still be appointed for Chapter 11


What is the means test?

Evaluates a filer’s income, debt, and living expenses -- a debtor must fail it to qualify for Chapter 7 bankruptcy (though he would still qualify for Chapter 13)

Does not apply to disabled veterans who became indebted during active duty or in defending national security


What are the calculations involved in the means test?

Allowable living expenses (which includes food, housing, transportation, insurance, and many other things) are subtracted from monthly income to get a net monthly income

Net monthly income x 60 is then compared to relevant thresholds


What are the relevant thresholds for the means test in 2013?

If the five-year amount is over the upper threshold ($11,725), Chapter 7 filing is forbidden

If under the lower threshold ($7,025), Chapter 7 filing is permitted

If between the thresholds, filing is permitted only if five-year amount is less than 25% of unsecured debt


What must any debtor do before filing for bankruptcy?

Receive credit counseling from an approved counseling service within 180 days of filing

Can be exempted if it would not be necessary or if the debtor could not comply (e.g. active duty military)


If filing for bankruptcy, what forms must the debtor file with the bankruptcy court?

(a) list of creditors
(b) schedule of assets and liabilities
(c) statement of financial affairs
(d) info on payroll, taxes, and so on


Whom must the debtor notify if he files for bankruptcy?

All his creditors

If a creditor doesn't receive notice, he won't be penalized for continuing to collect debt


What is joint bankruptcy?

A married couple's single petition to file for bankruptcy -- requires both spouses' consent

Main factor is determining how much to consolidate their assets and liabilities


Against whom can involuntary bankruptcy proceedings NOT be enforced?

Farmers, churches, schools, and charitable foundations


Who qualifies as a farmer?

Someone who has over 80% of his gross income come from farming, ranching, or raising livestock


What is the minimum threshold for involuntary bankruptcy for 2013?



When can three or more creditors file for a debtor's involuntary bankruptcy?

If the debtor has at least 12 creditors, and if the unsecured claims of the filing creditors is greater than the minimum threshold ($14,425)


What occurs if the debtor has fewer then 12 creditors?

The same rule applies, except that any number of creditors can petition for involuntary bankruptcy


Who can ordinarily file a petition for involuntary bankruptcy against a partnership?

Any number of general partners, so long as there is not a state or local law prohibiting it


Under what circumstances can people who are not general partners file a petition against a partnership?

If relief has been ordered to all general partners, then either (a) the trustee of a general partner's estate or (b) a creditor against the partnership can file a petition against the partnership


In a partnership, who can file an answer to an involuntary petition for bankruptcy?

Any general partner that did not file for the petition


What occurs if a debtor does not, within a reasonable time, oppose (controvert) a petition for involuntary bankruptcy?

Bankruptcy court will enter an order for relief against him


What occurs if a debtor opposes a petition for involuntary bankruptcy?

There will be no order for relief unless:
(a) the debtor is generally not paying debts as they are due, OR
(b) within 120 days of the petition's filing, a custodian took possession of the debtor's property


What are the rights and duties of a debtor's trustee?

He can sue or be sued, hire professionals to help him, and preside over the creditors' meeting, among other things. He represents the bankruptcy estate.


What occurs at a meeting of creditors?

The debtor is examined, under oath, as to his activity over his finances and property, to determine whether he is fit to be discharged

Such a meeting is not always necessary


What is an automatic stay?

Legal prohibition of all efforts for collection or foreclosure


Does an automatic stay hurt creditors' rights?

No, it simply postpones their fulfillment

It also protects creditors' rights by prohibiting any competition between creditors to get money from the limited resources of the debtor


What does an automatic stay NOT prevent?

Acts to foreclose or take possession regarding loans insured under the National Housing Act

Notices of tax debts

Evictions in a residential lease


When does an automatic stay end (or not apply)?

When the claimed property is not part of the debtor's estate, or when the bankruptcy case is completed


After bankruptcy is filed for, can a debtor or trustee continue to sell or lease property?

Yes, though this requires notifying any relevant parties if it is not done in the ordinary course of business


What do creditors and equity holders file with the court to prove their claim?

A creditor files a proof of claim

An equity holder files a proof of interest


If a creditor does not file to prove his claim, who else can do so on his behalf?

Anyone else who is liable with the debtor to the creditor can, or the debtor or trustee can


Can creditors make contingent claims against a debtor?

No, all claims have to be in dollar amounts, even if it requires estimation


What occurs if, after involuntary bankruptcy is filed, but before an order for relief is given, a new claim arises against the debtor?

As long as it is in the ordinary course of business, it will still be treated as a pre-petition claim

Creditors for these claims are called "middlemen" or involuntary gap creditors


What can happen if a creditor refuses to negotiate a pre-bankruptcy repayment plan with the debtor?

The bankruptcy judge can penalize him up to 20% of his claim


Why is it important to recognize administrative expenses in a bankruptcy proceeding?

Because they take priority over most unsecured creditors' claims

These must be filed with the court, not the trustee


What are included in administrative expenses?

Costs to maintain the estate, taxes incurred by it (including any related fines), payment for trustees and other professionals employed, fees for witnesses, etc.


How do claims with different priorities get paid in Chapter 7 bankruptcy?

Lower-level claims receive nothing until the higher-priority claims are fully satisfied

If not all claims at a given level can be fully satisfied, then they are satisfied pro rata


What is the priority of claims for Chapter 7 bankruptcy?

Secured creditors
Alimony & child support
Administrative expenses
Middleman debts
Employee benefits
Farmers & fishers
Deposits for consumer goods
Tax debts
DUI liabilities
Unsecured creditors

So Alligators And Middlemen Won't Eat Farmers, Depending on the Taxes Due U


How does the repayment of secured creditors work?

They can only be satisfied with the proceeds from liquidating the collateral, and they can only be satisfied to the extent of their secured claim

E.g. if the collateral sells for more than the secured claim, the secured creditor still only gets the amount of the claim (at this level of priority)


What is the maximum amount of unpaid wages which receive a priority claim?

For 2013, the maximum is $11,725 for each employee

Court approval is also required for insider payments (e.g. bonuses, severance)


Do just any unpaid wages receive a claim of priority in bankruptcy?

No, only those unpaid wages which were earned by employees within 180 days of the petition's filing or within 90 days of the end of the debtor's business, whichever came first


What is the maximum amount of unpaid employee benefits which receive a priority claim?

For 2013, the maximum is $11,725 for each employee MINUS the amount given for unpaid wages for the employee


Do just any unpaid employee benefits receive a claim of priority in bankruptcy?

No, only those unpaid wages which were earned by employees within 180 days of the petition's filing or by the end of the debtor's business, whichever came first


What is the maximum amount of priority claim that can be owed to farmers and fishers?

For 2013, the maximum is $5,775


What are priority claims for deposits on consumer goods?

They refer to individuals who purchased or rented a consumer good (or property) from the debtor and gave a deposit for it, but never received the good (or property)


What is the maximum amount of priority claim that can be owed for deposits on consumer goods?

For 2013, the maximum is $2,600 per individual


What is NOT included in the tax debts that receive a priority claim?

Fines or penalties for taxes


Once all the secured claims are settled, how is money for unsecured creditors distributed?

(1) to creditors who filed timely
(2) to creditors who filed tardily
(3) for fines or damages that arose before the order of relief on claims (even if secured), other than compensation for economic loss
(4) to repay interest accrued from the date of filing
(5) back to the debtor


How may a debtor select property to exempt from creditors?

Under either the federal exemption system or his state's exemption system


What is generally included under an exemption system?

Claims in residential property, a car, consumer goods, jewelry, tools of the trade, certain dividends and interest, rights to social security and welfare benefits, and other things


When can exempt property still be seized?

After the case, it can still be seized for (1) taxes not discharged by bankruptcy, (2) alimony and child support, and (3) any liens that the trustee did not avoid


How often can someone be discharged with a Chapter 7 bankruptcy?

Generally, once every eight years


When would a debtor be required to file for Chapter 13 bankruptcy?

If he received a Chapter 7, 11, or 12 discharge in the last four years, or if he received a Chapter 13 discharge in the last two


What debts does a Chapter 7, 11, or 13 bankruptcy NOT discharge?

Taxes, fines, unscheduled debts, alimony and child support, educational loans, cash advances, DUI debts, and other things


Are debts for malicious injury and fraud dischargeable?

If the debtor has not listed creditors for these kinds of debts, then they cannot be discharged, but if he has and the creditor has not initiated proceedings for it, then they are discharged


What are bankruptcy offenses?

Acts which prevent a debtor from receiving a discharge, if committed on or within one year of the filing date


What are some examples of bankruptcy offenses?

Lying under oath, withholding info from a trustee who is entitled to it, destroying or concealing property, etc.


What property of the debtor does not become part of his estate?

(1) earnings after bankruptcy has commenced
(2) any power exercised for another's benefit (e.g. power of appointment)
(3) property the debtor holds in trust, unless it is a bare legal title (i.e. not held for another's benefit)


What are avoiding powers?

Powers to avoid claims by creditors


What avoiding powers does a trustee have over liens?

He can avoid liens
(1) which became effective upon the debtor's insolvency or bankruptcy
(2) which, at the date of filing, are not enforceable against a BFP (bona fide purchaser)
(3) related to rent


What are preferential transfers?

Essentially, they are payments made to creditors before the bankruptcy filing which the debtor then demands to be returned


What are the elements of a preferential transfer?

Benefits the creditor
Already-existing debt
Ninety days before filing

Minimum of $5,850 (for 2013)
Insolvent debtor
Creditor received more than he would through bankruptcy


Can a transfer be a preferential transfer if it is made earlier than 90 days before the bankruptcy filing?

Yes -- if the creditor is an insider who had grounds to believe the debtor would be insolvent, then it can still be a preferential transfer if it occurs one year before the filing date

If the property is later transferred to a non-insider, it is not recoverable


What cannot qualify as a preferential transfer?

-repayments of debts in the ordinary course of business within 45 days of the debts' being incurred
-purchase money security interests (i.e. collateral which secured the loan to purchase the collateralized item itself)
-security interests in A/R or inventory
-alimony and child support


What other kind of transfers can a trustee avoid?

Fraudulent transfers, if made within two years of the filing date


What transfer can a trustee avoid for a partnership debtor?

Any transfer made to a general partner within one year of the filing, if the partnership was (or became) insolvent at the time of the transfer


What is the Truth in Lending Act of 1968 (TILA)?

Requires the written disclosure of credit terms for any consumer credit sale or loan up to $25,000 (or for any amount if the debtor has collateral)

Credit terms = interest (quoted as an APR), fees, sales charges, insurance, etc.


What is open-end credit?

An arrangement where the debtor is permitted to repay numerous credit transactions either in one lump sum or in installments -- e.g. credit cards

Also called revolving credit


What is closed-end credit?

An arrangement where the debtor makes various periodic (and often fixed) payments -- e.g. car payments or mortgages


What are adjustable rate mortgages (ARMs)?

Mortgages where the interest rate changes according to an index

Also called variable rate mortgages


What is the Fair Credit Reporting Act (FCRA)?

Ensures that credit reporting agencies are accurate when reporting consumer credit histories, prohibiting any false or obsolete information


For the FCRA, when does credit information usually become obsolete?

After 7 years

For bankruptcy info, after 10 years


According to the FCRA, what must reporting agencies do before making investigative reports?

Give written notice to the consumer


According to the FCRA, are consumers entitled to receive files about themselves from reporting agencies?

Yes, they can receive copies of their files on request

Info includes recipients of the data in the last 6 months (or in the last 2 years, if done for employment purposes)


According to the FCRA, what can consumers do if they encounter inaccurate info about themselves?

Challenge the bad info

The consumer can also include his own explanation of any dispute in his file


What is the Equal Credit Opportunity Act of 1974 (ECOA)?

Prohibits businesses from refusing to give credit on the basis of race, color, religion, national origin, sex, marital status, or age -- and thus restricts what questions can be asked in a credit application

Enforced by Federal Trade Commission


What other discrimination is prohibited by the ECOA?

Credit cannot be refused solely because the applicant's income comes from welfare or because he exercised a right under the Consumer Protection Act


What does the ECOA require when creditors notify applicants of acceptance or refusal of credit?

Creditors must notify applicants within 30 days, and give specific reasons for any refusal


What is the Fair Debt Collection Practices Act of 1977 (FDCPA)?

Prohibits abusive debt collection practices by debt collectors

Applies to third-party debt collectors, not to the internal collectors of a creditor


What sort of abusive debt collection practices are forbidden by the FDCPA?

-third-party communication (only may be for finding a debtor's location, but cannot disclose why)
-reaching the debtor at unusual times, including at work (if the employer doesn't permit it)
-contacting the debtor's attorney
-using threats or obscenities, or false info


Does the FDCPA ever require debt collectors to stop communicating with a debtor?

Yes -- if the debtor provides written notice that he refuses to pay (or otherwise tells the collectors to stop)

The collector can then seek remedies for breach (and tell the debtor he is doing so)


How often are telemarketers required to sync their do-not-call list with the national do-not-call registry?

Every three months

Violations incur a fine up to $11,000


Which organizations are exempted from honoring the do-not-call registry?

If not forbidden by state law, charities, political organizations, telephone surveyors, and insurance businesses can call


What situations allow someone to be called, even if he is on the do-not-call registry?

(1) an established business relationship (within 18 months)
(2) if the customer made an inquiry (within 3 months)
(3) if the customer provides written permission


What are statutory liens?

Liens created by operation of law -- as opposed to consensual liens


What are different kinds of consensual liens?

(1) secured transactions -- secured by personal property
(2) mortgages -- secured by real property
(3) suretyship contracts -- secured by a third person's promise


What are mechanic's liens and artisan's liens?

Mechanic's liens = statutory liens given to someone who repairs or improves real property, where the liened item is itself the real property

Artisan's liens = statutory liens given to someone who improves personal property, where the liened item is itself the personal property
-This lien ends if the artisan transfers possession of the property


What are other kinds of statutory liens?

(a) bailee's liens = storers of property, like warehousemen, can retain possession of property until they are paid for
(b) landlord's/innkeeper's liens = payment for rent or hotel rooms can be secured through personal property kept on the premises
(c) tax liens = a government entity can place a lien to secure payment for overdue taxes


What are judicial liens?

Liens created by legal judgment or levy -- different from statutory liens, which occur more in the ordinary flow of things


If different unsecured creditors are in a race to obtain an insolvent debtor's assets, what are different actions they might pursue?

(1) attachment = obtain a writ of attachment, which designates property to be the creditor's
(2) execution = obtain a writ of execution, which actually enforces the attachment, i.e. seizes the designated property (usually so it can then be sold)
(3) garnishment = obtain an order of garnishment, which requires a third party to give money due the debtor to the creditor instead (often an employer, though sometimes a bank)


What is a fraudulent conveyance?

A transfer of property by the debtor in order to delay, hinder, or defraud creditors -- can be an exchange that has unfair consideration involved

E.g. selling a car for $1 to someone else in order to prevent creditors from seizing it


Can any property of the debtor's be transferred in a fraudulent conveyance?

No: if exempt property is transferred, it cannot be a fraudulent conveyance


What is an assignment for the benefit of creditors (ABC)?

The debtor voluntarily gives the legal title for his nonexempt property to a trustee (the assignee), who then liquidates it and distributes money to the creditors


What is a composition agreement?

A contractual agreement of several creditors with a debtor to accept a smaller but early payment to satisfy his full debt to them


What is an extension agreement?

A contractual agreement of several creditors with a debtor to satisfy their full debt over a period of time past the due date


Under what circumstances can participating creditors void a composition or extension agreement?

If either (a) they were not made aware of the NON-participating creditors or (b) a creditor was secretly given special treatment


What is an equity receivership?

An arrangement, supervised by the court, for an appointed "receiver" to take possession (but not title) of the debtor's property and use it accordingly

Can involve liquidation, holding the property, and operating the debtor's business


How does an equity receivership affect liens?

Even though the title does not pass to the receiver, creditors' liens are unenforceable during receivership


Who are the three parties in a suretyship contract?

(1) principal debtor
(2) creditor
(3) surety


In a suretyship contract, is a surety primarily liable?

Yes, which means that his duty to pay is not contingent upon the debtor's becoming insolvent -- he is liable if the debtor does not pay for any reason


What is a surety bond?

A written acknowledgement of a surety relationship


What are different kinds of surety bonds?

(1) construction bonds = guarantee the performance of supply or construction contracts (though not necessarily the payment of workers' wages) -- also called performance bonds
(2) fidelity bonds = guarantee the faithful performance of employee duties
(3) official bonds = guarantee the faithful performance of duties by a public official (required by law)
(4) judicial bonds = all bonds in judicial proceedings (e.g. bail bonds)


Can partnerships and corporations enter into suretyship contracts?

Partnerships can if the partnership agreement doesn't forbid it, though a partner cannot bind the partnership to such a contract without express authorization

Corporations generally cannot, unless suretyship is a power specifically authorized


Do indemnification contracts count as suretyship contracts?

No, because they only involve two parties (e.g. when an insurance company insures an individual in case of loss)


Is extra consideration normally given in a suretyship contract?

Normally a suretyship contract is made at the same time as the primary contract, so there's no extra consideration -- but there would need to be extra if the suretyship contract were made later


How does a guaranty contract differ from a suretyship contract?

It is usually made as a separate agreement with extra consideration, and a guarantor's liability is secondary rather than primary (i.e. contingent on the debtor defaulting)


How does an unconditional guarantor differ from a conditional guarantor?

An unconditional guarantor automatically becomes liable upon the debtor's default, whereas a conditional guarantor also requires some conditional precedent to become liable

Usually the condition involves the creditor exhausting other options


Is a creditor permitted to proceed immediately against the surety before trying to collect from the debtor?

Yes, since the surety is primarily liable

The creditor doesn't even need to liquidate the debtor's collateral if he defaults -- he can still collect all from the surety


How are co-sureties liable for a shared obligation?

Usually it is stipulated by the particular contract, but in general, they are jointly and severally liable to the creditor, each being liable for the amount which they personally guaranteed


Can two people be co-sureties if they do not know each of them are co-sureties?

Yes -- they only need to share the same obligation


How is a sub-suretyship different from a co-suretyship?

A sub-suretyship involves a surety (the principal surety) who is primarily liable for the entire amount and another surety (the sub-surety) who is liable for him


What is the formula used to determine how much co-sureties should contribute?

liability assumed by co-surety /
liability assumed by all co-sureties x
total amount paid on debt thus far =
required contribution of co-surety thus far


What is an example of a calculation of co-sureties' required contributions?

On a $60k debt, A is liable for $16k, B for $20k, and C for $24k. The debtor defaults, and A pay $45k. This satisfies 3/4 of the total debt (45/60), so that the effective contribution for A, B, and C thus far is $12k, $15k, and $18k respectively. At this point, B and C owe A $15k and $18k, and if that is paid, all of them will still owe $4k, $5k, and $6k (respectively) to pay off their liability in full.


How is a co-surety's share in collateral calculated?

liability assumed by co-surety /
liability assumed by all co-sureties x
amount of collateral =
share in collateral


What happens if a creditor releases a co-surety?

That automatically releases other co-sureties by the amount of the released co-surety's liability


What kind of right might a co-surety have against other co-sureties?

A right of contribution -- i.e. a right to their contributions if he pays more than his share


What kind of right might a surety have against the principal debtor?

Right of indemnity/reimbursement -- this right does not accrue if the surety pays voluntarily


What is a surety's right of exoneration?

When a surety files a suit against the debtor to show that the debtor is wrongly withholding assets in order to avoid paying the debt, he is exercising his right to exoneration (i.e. his right not to pay)


What is a surety's right of subrogation?

His right to obtain the rights which the creditor has upon the debtor, after fulfilling his end of the bargain

E.g. the surety can gain a lien which the creditor had on the debtor


What may the surety do if a creditor induces a debtor into a contract through fraud or duress?

The surety is bound or not depending on whether the debtor accepts the contract or voids it


What may the surety do if the debtor induces the surety into making his promise through fraud or duress?

The contract is not voidable unless the creditor was aware of the fraud


How might a surety avoid liability for his duty?

If the creditor failed to inform him of material facts regarding the debtor's ability to pay


What happens if a creditor releases a debtor's collateral before the debtor's debt is satisfied?

The surety's duty is released by the amount of the collateral


What happens if a creditor releases a co-surety without the consent of the other co-sureties?

They are thereby released as well


What happens if a creditor releases the principal debtor without the surety's consent?

The surety is released, unless the creditor reserved rights against the surety

The surety still has a right to collect from the debtor, in this case (and thus it's not really a release as much as a promise of the creditor not to sue the debtor)


If the principal debtor's contract is modified, how does it affect the surety's obligations?

The surety is discharged only if the contract is materially altered -- unless the surety consents to the changes