Bankruptcy Process Flashcards
Question #2 (AICPA.911143REG-BL)
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 makes 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 instead of a Chapter 11 reorganization under the Federal Bankruptcy Code. One year later, the equipment is sold to Acme for less than the balance due on the note .
If Master’s voluntary petition is filed properly,
A. Master will be entitled to conduct its business as a debtor-in-possession, unless the court appoints a trustee.
B. A trustee must be immediately appointed by the creditors.
C. Lawsuits by Master’s creditors will be stayed by the Federal Bankruptcy Code.
D. The unsecured creditors must elect a creditors’ committee of 3-11 members to consult with the trustee.
C. Lawsuits by Master’s creditors will be stayed by the Federal Bankruptcy Code.
Once a petition is filed, there is an automatic stay under both Chapter 7 and 11, which ends almost any proceeding against the debtor. The creditors will then have to seek relief from the bankruptcy court and not through independent legal action.
Wrong Answer
B. A trustee must be immediately appointed by the creditors.
In a Chapter 7 bankruptcy, the U.S. Trustee appoints an interim trustee after the order for relief is entered. Under a Chapter 11 bankruptcy, the debtor in possession generally becomes the trustee. Although in a Chapter 7 bankruptcy the creditors can select a permanent trustee, it rarely happens.
Question #5 (AICPA.921138REG-BL)
On August 1, 2004, Hall files a voluntary petition under Chapter 7 of the Federal Bankruptcy Code.
Hall’s assets are sufficient to pay general creditors 40% of their claims.
The following transactions occurred before the filing:
- On May 15, 2004, Hall gave a mortgage on Hall’s home to National Bank to secure payment of a loan National had given Hall two years earlier. When the loan was made, Hall’s twin was a National employee.
- On June 1, 2004, Hall purchased a boat from Olsen for $10,000 cash.
- On July 1, 2004, Hall paid off an outstanding credit card balance of $500. The original debt had been $2,500.
The payment to Olsen was
A. Preferential, because the payment was made within 90 days of the filing of the petition.
B. Preferential, because the payment enabled Olsen to receive more than the other general creditors.
C. Not preferential, because Hall is presumed insolvent when the payment was made.
D. Not preferential, because the payment was a contemporaneous exchange for new value.
D. Not preferential, because the payment was a contemporaneous exchange for new value.
When a debtor declares bankruptcy, the debtor cannot prefer one antecedent creditor over another. Antecedent creditors hold debts at the time of the bankruptcy. Transactions, or contemporaneous exchanges for new value, may be performed without giving preference. It is only payments made to “old” creditors that are preferential payments.
C. Not preferential, because Hall is presumed insolvent when the payment was made.
A debtor need not be insolvent to declare bankruptcy, and there is no presumption of insolvency when a purchase is made. It does not affect the status of the creditors. Antecedent creditors still hold debts at the time of the bankruptcy, and it is still only this class of creditors that cannot receive preferential treatment.
Question #7 (AICPA.082058REG-II.C.II)
Which of the following statements is correct concerning what constitutes a debtor’s bankrupt property estate?
A. The appreciated value, since the petition was filed, of the debtor’s stamp collection.
B. A flat screen TV set purchased 30 days after the filing of the debtor’s petition.
C. Property left to the debtor by her grandmother, who passed away nine months after the petition was filed.
D. Wages earned within 180 days of the petition being filed.
A. 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.
Wrong Answer
B. A flat screen TV set purchased 30 days after the filing of the debtor’s petition.
Generally, property acquired after the petition into bankruptcy is filed does not become part of the debtor’s bankrupt estate.
Question #8 (AICPA.911144REG-BL)
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
A. Be set aside as a preferential transfer, because the fair market value of the collateral was greater than the installment-note balance.
B. Be set aside as a preferential transfer, unless Acme showed that Master was solvent on January 15, 2005.
C. Not be set aside as a preferential transfer, because Acme was oversecured.
D. Not be set aside as a preferential transfer if Acme showed that Master was solvent on March 15, 2005.
C. 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.
Wrong Answer
D. Not be set aside as a preferential transfer if Acme showed that Master was solvent on March 15, 2005.
Master does not have to be solvent or insolvent in order to make a preferential payment. A preferential transfer is simply one that is made on a debt that existed before filing for bankruptcy, within 90 days of that filing. The debtor is presumed insolvent during this period.
Question #9 (AICPA.082055REG-II.C.I)
Which of the following statements is correct?
A. 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.
B. 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.
C. If the court finds that a debtor meets the median-family-income test, the court cannot dismiss a Chapter 7 petition based on abuse.
D. 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
A. 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.
Wrong Answer
B. 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.
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.
