Debtor-Creditor relationships

Question 1

Sorus and Ace have agreed, in writing, to act as guarantors of collection on a debt owed by Pepper to Towns, Inc. The debt is evidenced by a promissory note.

If Pepper defaults, Towns will be entitled to recover from Sorus and Ace unless
A. Sorus and Ace are in the process of exercising their rights against Pepper.
B. Sorus and Ace prove that Pepper was insolvent at the time the note was signed.
C. Pepper dies before the note is due.
D. Towns has not attempted to enforce the promissory note against Pepper.

Answer 1

D - A guarantor on a guaranty of collection is conditionally responsible for a debt only if collection against the primary debtor fails.

Question 2

Which of the following rights does one cosurety generally have against another cosurety?
	A.  	Exoneration.
	B.  	Subrogation.
	C.  	Reimbursement.
	D.  	Contribution.

Answer 2

D- When two people act as a cosurety, neither can generally be held liable for an entire debt. Thus, when one cosurety, upon debtor’s default, pays more than his or her proportional share, the cosurety can recover from the other cosurety the amount paid in excess of his or her share.

Question 3

Which of the following rights does a surety have?

1. Right to compel the creditor to collect from the principal debtor
2. Right to compel the creditor to proceed against the principal debtor’s collateral

Answer 3

Neither.

Question 4

Definition of suretyship contract

Answer 4

Relationship whereby one person agrees to answer for the debt or default of another.

Question 5

Definition of surety

Answer 5

Promises to pay debt on default of principal debtor.

Question 6

Definition of subrogation

Answer 6

Upon payment, surety obtains same rights against debtor that creditor had

Question 7

Definition of exoneration

Answer 7

Right of surety to require the debtor to pay before surety pays.

Question 8

Which of the following elements must be contained in a valid deed?
Purchase Price Description of the Land

Answer 8

Description of land

Question 9

Which of the following is a defect in marketable title to real property?
A. Recorded zoning restrictions.
B. Recorded easements referred to in the contract of sale.
C. Unrecorded lawsuit for negligence against the seller.
D. Unrecorded easement.

Answer 9

D - These types of hidden defects affect marketable title.

Question 10

Which of the following deeds will give a real property purchaser the greatest protection?
	A.  	Quitclaim.
	B.  	Bargain and sale.
	C.  	Special warranty.
	D.  	General warranty.

Answer 10

D - A general warranty deed is the deed that gives the grantee/transferee the best protection on title.

Question 11

Which of the following interests in land conveys the greatest ownership rights?
	A.  	Easement by implication.
	B.  	Life estate.
	C.  	Fee simple.
	D.  	Nonfreehold estate.

Answer 11

C - A fee simple estate gives the owner the right to sell, will, mortgage, and lien the property. It is the highest form of land ownership.

Question 12

Which of the following statements is correct concerning the voluntary filing of a petition in bankruptcy?
A. If the debtor has 12 or more creditors, the unsecured claims must total at least $5,000.
B. The debtor must be insolvent.
C. If the debtor has fewer than 12 creditors, the unsecured claims must total at least $5,000.
D. The petition may be filed jointly by spouses.

Answer 12

D - Petitions are often filed by spouses jointly. Either may file alone, or they may file together.

Question 13

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.

Answer 13

A - 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.

Question 14

A party involuntarily petitioned into bankruptcy under Chapter 7 of the Federal Bankruptcy Code who succeeds in having the petition dismissed could recover

1. Court costs and attorney’s fees
2. Compensatory damages
3. Punitive damages

Answer 14

Potentially all

Question 15

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.

Answer 15

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.

Question 16

writ of attachment vs garnishment

Answer 16

Garnishment is the legal process of having sums deducted directly from a debtor’s paycheck to satisfy a debt.
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.

Question 17

Which of the following is correct?
A. A bankrupt accounting limited liability partnership can claim the same type and amount of exemptions as an individual bankrupt debtor.
B. A debtor’s interest in a motor vehicle is not exempt.
C. Since federal law generally governs bankruptcy proceedings, federal law exemptions take priority over state-law exemptions when both cover the same items.
D. 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.

Answer 17

D

Question 18

The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code
A. Terminates liens on exempt property.
B. Terminates all security interests in property in the bankruptcy estate.
C. Stops the debtor from incurring new debts.
D. Stops the enforcement of judgment liens against property in the bankruptcy estate.

Answer 18

D

Question 19

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

Answer 19

A

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.

Question 20

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.

Answer 20

A - The debtor’s property includes not only the original property value, but any value appreciation of that property after the petition is filed.

Question 21

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.

Answer 21

C - 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.

Question 22

Under the federal Bankruptcy Code, which of the following rights or powers does a trustee in bankruptcy not have?
A. The power to prevail against a creditor with an unperfected security interest.
B. 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.
C. The right to use any grounds available to the debtor to obtain the return of the debtor’s property.
D. The right to avoid any statutory liens against the debtor’s property that were effective before the bankruptcy petition was filed.

Answer 22

D - 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).

Question 23

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?
A. Federal tax lien filed May 15, 2005.
B. A secured debt properly perfected on February 10, 2005.
C. Trustee’s administration cost filed September 30, 2005.
D. Employee wages due March 30, 2005.

Answer 23

B - 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.

Question 24

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

Answer 24

D - 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.