07 Debtor-Creditor Relationships

Question 1

List the top four categories in the order of distribution in a bankruptcy hearing.

Answer 1

1. Secured parties
2. Child support
3. Bankruptcy administration costs (trustee, accountant, lawyer, appraisal fees etc.)
4. Gap creditors

Question 2

List the types of discharge.

Answer 2

Payment or tender of payment
Cancellation or renunciation
Reacquisition
Certification of a check
Impairment of recourse or collateral

Question 3

What is a reaffirmation agreement?

Answer 3

It is a promise by the bankruptcy debtor to pay a debt that would otherwise be discharged in bankruptcy.

Question 4

What is the time limit for including inheritances in a bankrupt’s estate?

Answer 4

The bankrupt must have the right to receive the inheritance before the bankruptcy or within 180 days of declaration.

Question 5

List the voidable preferences in bankruptcy.

Answer 5

Property transferred by fraud, duress, undue influence, or mistake
Fraudulent conveyances
Transfers to insiders
Transfer in the 90 days preceding the bankruptcy
Transfers to creditors while insolvent (presumed insolvent for 90 days prior to filing; also applies to security interests granted)

Question 6

Define “chattel paper.”

Answer 6

Writing(s) that evidence both a security interest in a good (or software) and a monetary obligation to pay—example of a security agreement

Question 7

Define “intangibles.”

Answer 7

Any personal property other than goods, accounts, chattel paper, documents, instruments, money, deposit accounts, letters of credit, and investment property - Examples: oil or book royalties, patents, copyrights.

Question 8

Describe what happens to a security interest when a debtor has signed and executed a security agreement, but the collateral has not been shipped to the debtor from the seller.

Answer 8

The security interest does not attach until the debtor has an interest in the goods (i.e., until identification has occurred).

Question 9

Define “perfection.”

Answer 9

A means by which a secured party gains priority to a debtor’s collateral over other third parties who also claim to have an interest in the same collateral.

Question 10

Define “security agreement.”

Answer 10

Agreement that creates a security interest.

Question 11

Define “financing statement.”

Answer 11

It is a document that is filed. It needs adequate description and the names of the debtor and the secured party.

Question 12

Explain when a creditor has temporary perfection.

Answer 12

When a debtor has moved to another state, the creditor has four months of perfection in the new state, which can be continued with filing a financing statement in the debtor’s new state.

Question 13

Describe filing locations.

Answer 13

Central (state level) except for fixtures and crops (local with property records).

Question 14

Define “collateral.”

Answer 14

Subject of the security interest.

Question 15

Define “debtor.”

Answer 15

The person who owes payment.

Question 16

Define “absolute guaranty.”

Answer 16

Promise by a surety or guarantor to pay no matter what happens or why debtor defaulted.

Question 17

Define “conditional guaranty.”

Answer 17

A surety or guarantor promises to pay only when certain conditions have been made, such as after the creditor has reduced the debtor’s obligation to a judgment or after the creditor has exhausted all collateral. (Also called a guarantor of collection.)

Question 18

What is the formula for the right of a co-surety to collect from another (i.e., the right of contribution)?

Answer 18

Amount guaranteed by surety / Total agreed to be paid by all sureties × Amount to be paid to the creditor (i.e., the amount owed by this surety to the creditor or to any surety who had to pay the full amount)

Question 19

What defenses are available to a surety?

Answer 19

Contracts defenses of the principal debtor, such as fraud, duress, failure of consideration, breach.

Question 20

What defenses are not available to a surety?

Answer 20

Capacity of the principal debtor
Bankruptcy of the principal debtor
Statute of limitations running on the debtor’s obligation

Question 21

Under what circumstances are compensated and uncompensated surety discharged from liability?

Answer 21

On material alterations, uncompensated surety is discharged; compensated surety is discharged only if modification increases the risk.

Question 22

Define “secured party.”

Answer 22

The creditor who has a security interest in the debtor’s collateral.

Question 23

Define “security interest.”

Answer 23

The interest in the collateral that secures payment or performance of an obligation.

Question 24

Describe the 60% rule as it relates to a secured party.

Answer 24

If the collateral is consumer goods and 60% or more of the debt or price has been paid, then the creditor must sell the goods.

Question 25

What is the purpose of the Soldiers and Sailors Relief Act?

Answer 25

Creditor cannot repossess goods from active-duty military debtors.

Question 26

List the order of distribution of proceeds from the sale of collateral.

Answer 26

1. Expenses in repossession, keeping, and resale
2. Balance of debt owed to secured party
3. Junior lien holders who have made written demands
4. Debtor unless collateral is accounts or chattel paper

Question 27

Define “mechanic’s lien.”

Answer 27

Lien for work or materials provided on real property.

Question 28

Define “artisan’s lien.”

Answer 28

Lien on personal property for repair, improvement, or alteration.

Question 29

How often are the amounts on filing requirements and exemptions for bankruptcies changed?

Answer 29

The amounts on filing requirements, exemptions, and so on, are set to increase automatically every three years.

Question 30

Define “order for relief.”

Answer 30

Court order issued pending a hearing on an involuntary petition.

Question 31

What are the special responsibilities of consumers?

Answer 31

Must have had credit counseling
Must meet the means test
Dismissal of petition for abuse if a consumer debtor has the means to pay according to code calculations of income

Question 32

Define “automatic stay.”

Answer 32

Order issued by a court that stops creditors from collecting debt once a petition is filed

Question 33

What is the federal limit for garnishment of wages?

Answer 33

25% of the debtor’s wages

Question 34

List the types of property that can be attached.

Answer 34

Real property
Personal property
Accounts
Receivables

Question 35

List the basic duties of a bankruptcy trustee.

Answer 35

Collect property and reduce it to money.
Be accountable for property and make a final report.
Investigate financial affairs of the debtor and creditor’s claims.
Furnish information and reports to interested parties and domestic-support creditors.
Review all filings by the debtor and a statement whether the filing is an abuse under the means income test.

Question 36

Define “debtor’s estate.”

Answer 36

All property held at commencement (and for 180 days after) plus appreciation (except employee benefit contributions) and property reacquired by trustee (voidable transfers)

Question 37

Describe the first creditors’ meeting.

Answer 37

Called by the U.S. Trustee on behalf of the court.

Question 38

Define “insider.”

Answer 38

An individual or business that has a close relationship with the debtor.

Question 39

Who can claim exemptions in a bankruptcy?

Answer 39

Only individuals, not partnerships or corporations, can claim exemptions.

Question 40

What is the role of debtor at creditor’s meeting?

Answer 40

Appear to testify about assets and debts

Question 41

Define “garnishment.”

Answer 41

Right of the judgment creditor to garnish (take a portion of) the debtor’s wages through direct filing with employer. (Federal law limits amount that can be garnished to 25% of take-home pay.)

Question 42

List the different types of liens.

Answer 42

Mortgages
Secured transactions
Mechanic’s liens
Worker’s liens
Judgment liens
Artisan’s liens

Question 43

What are the end results of a creditor knowingly violating a stay?

Answer 43

This action constitutes a crime.
The creditor is liable for costs, actual and possibly punitive damages, and attorney fees.

Question 44

List the rights of peaceful possession upon the debtor’s default.

Answer 44

Possession without committing:
Trespass;
Assault and/or battery; or
Breaking and entering.

Question 45

Describe the right of redemption.

Answer 45

If the secured party is not allowed to keep the collateral in possession in full satisfaction of the debt, until there is a sale, the debtor or any other secured party has a right of redemption and by doing so can regain possession of the collateral, with full payment of amount due and expenses.

Question 46

What are the debtor’s rights when the debt is paid in full?

Answer 46

The debtor can demand that the creditor file a release of the collateral.

Question 47

What governs the bankruptcy process?

Answer 47

Federal law administered by bankruptcy courts

Question 48

What are the requirements for filing voluntary bankruptcy?

Answer 48

Any individual, partnership, or corporation can file.
Consumers must undergo credit counseling with a nonprofit within 180 days of filing.
Filers need not be insolvent. There are tests for determining eligibility for bankruptcy, but insolvency is not required. The test, including the means test, is whether the debtor lacks the ability to pay debts as they become due.

Question 49

What can a creditor garnish in order to satisfy a judgment?

Answer 49

The wages of the debtor.

Question 50

List what is not included as income in applying the means test for consumer bankruptcies.

Answer 50

Income tax refunds
Social security retirement benefits

Question 51

Explain the difference between a U.S. bankruptcy trustee and a case trustee.

Answer 51

In Chapter 11, the U.S. trustee oversees for the bankruptcy court what the debtor is doing. A case trustee is what is appointed in Chapter 7 to handle the bankruptcy process.

Question 52

List the five types (or chapters) of bankruptcy.

Answer 52

Chapter 7
Chapter 9
Chapter 11
Chapter 12
Chapter 13

Question 53

What is a Chapter 9 bankruptcy?

Answer 53

Adjustment of Debts of a Municipality

Question 54

What is a Chapter 12 bankruptcy?

Answer 54

Adjustment of Debts of a Family Farmer and Fisherman

Question 55

What is a Chapter 13 bankruptcy?

Answer 55

Adjustment of Debts of an Individual with Regular Income

Question 56

What is a Chapter 11 bankruptcy?

Answer 56

Reorganization (for businesses)

Question 57

What is a Chapter 7 bankruptcy?

Answer 57

Straight bankruptcy or liquidation

Question 58

List the actions not stayed by a bankruptcy petition.

Answer 58

Criminal prosecution of the debtor
Collection of child support and/or alimony
Tax audits
The right of the United States Department of Housing and Urban Development (HUD) to foreclose under the National Housing Act
Investigations by a securities regulatory agency

Question 59

Define “attachment.”

Answer 59

Action by a creditor for a court-ordered seizure for taking into custody the debtor’s nonexempt property prior to the creditor getting a judgment

Question 60

What are the requirements for involuntary petition?

Answer 60

If there are 12 or more creditors, then 3 creditors with aggregated unsecured debt owed of $18,600 (through March 31, 2025) must file.
If fewer than 12 creditors, then any creditor owed $18,600 (through March 31, 2025) may file.