Bankruptcy Options Flashcards
Question #9 (AICPA.082053REG-II.C.I)
Green is heavily in debt to numerous creditors. Green does have some assets, including an antique car that he drives in parades and to other functions. Green is looking for a method that will allow him to get out of debt without going into bankruptcy, and will allow him to continue to drive his antique car. Green sells the antique car to a friend living in another city at a price estimated at 70% of the car’s actual value. The friend has agreed to allow Green to keep the car and use it as before the sale. Green then gets all other creditors, except Sharp, to sign an agreement that, upon selling all of his remaining non-exempt assets, and with an appropriate division of proceeds, they would release him from his debts. Which of the following is correct?
A. Since the vast majority of creditors signed the Composition of Creditor’s Agreement, Sharp is also bound by the agreement.
B. The above agreement is called an Assignment for the Benefit of Creditors.
C. If Sharp cannot prove the transfer of the antique car as fraud-in-fact, Sharp has virtually no remedy available.
D. Sharp can pursue an action based on fraud-in-law to set aside the sale to Green’s friend.
D. Sharp can pursue an action based on fraud-in-law to set aside the sale to Green’s friend.
Since Sharp did not sign the Agreement, he is not bound by it. To be an assignment for the benefit of creditors, Green would have to voluntarily transfer certain assets to a trustee or an assignee who, in turn, offers each creditor a pro rata payment. This not only did not happen, but the Agreement assured him that almost all of his debts would be cancelled. Although there may be fraud-in-fact on the sale of the antique car, it will be difficult to prove, since there was a substantial payment (70% of the car’s estimated value) to a non-relative. What Sharp can prove is fraud-in-law, whereby, despite the sale, Green was allowed to possess and use the car as if the sale never took place. This gives Sharp the basis for an action of fraud-in-law; a presumption of fraud, which it is doubtful Green can rebut.
Wrong Answer
B. The above agreement is called an Assignment for the Benefit of Creditors.
Green never transfers any assets to a trustee or assignee to tender amounts pro rata to creditors to accept or reject.
Question #10 (AICPA.082052REG-II.C.I)
Smith takes his grandfather clock to A.S. Clockwise, a seller of clocks, for cleaning and repairs. Clockwise has a clearly stated policy that all repairs must be paid for in cash unless prior credit arrangements have been approved. The estimated cost of the cleaning and repairs is stated as $100-$125. Clockwise makes the repairs and, with cleaning, the bill is $120. Smith owns a number of non-exempt assets. When Smith comes to pick up his grandfather clock, he refuses to pay cash, and Clockwise refuses to turn over the grandfather clock to Smith. Which of the following is the best lien remedy available for Clockwise?
A. Mechanic’s lien.
B. Writ of execution.
C. Attachment of non-exempt assets.
D. Artisan’s lien.
D. Artisan’s lien.
Clockwise has a common-law possessory lien because Clockwise has made repairs to Smith’s grandfather clock, did not give approval for credit, and still has possession. Clockwise has an artisan’s lien and with proper notice can sell the clock to satisfy the lien.
wrong Answer
B. Writ of execution.
Although it is a possible remedy for Clockwise, it is not the best lien remedy. A writ of execution is available if Clockwise receives an unsatisfied judgment. To get a judgment, Clockwise will need to take the time to sue, get a judgment, and then, if the judgment is not paid, go through the process of having an official possess and sell non-exempt property of Smith.
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
Yes Yes
Yes No
No Yes
No No
No No
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.
My wrong Answer
Yes No
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.
Question #13 (AICPA.911142REG-BL)
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
A. If Master had fewer than 12 creditors at the time of filing.
B. Unless Master can show that a reorganization under Chapter 11 of the Federal Bankruptcy Code would have been unsuccessful.
C. Unless Master can show that it is unable to pay its debts in the ordinary course of business or as they come due.
D. If Master is an insurance company.
D. 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.
Wrong Answer
B. Unless Master can show that a reorganization under Chapter 11 of the Federal Bankruptcy Code would have been unsuccessful.
There does not need to be such a showing. Someone may freely choose the straight bankruptcy of Chapter 7 over the reorganization of Chapter 11. Chapter 7 relief may be sought by almost any person or company provided that they have some outstanding debt.
To file for bankruptcy under Chapter 7 of the Federal Bankruptcy Code, an individual must
A. Have debts of any amount.
B. Be insolvent.
C. Be indebted to more than three creditors.
D. Have debts in excess of $5,000.
A. 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.
Wrong Answer
B. Be insolvent.
A debtor does not have to be insolvent to seek bankruptcy protection. So long as the debtor is not “substantially abusing the process,” the protections will be granted.
