R7-3 Flashcards

1
Q

Under Chapter 7 of the federal Bankruptcy Code, what effect does a bankruptcy discharge have on a judgment creditor when there is no bankruptcy estate?

a.

The debtor is relieved of any personal liability to the judgment creditor.

b.

The judgment creditor’s claim is nondischargeable.

c.

The debtor is required to pay a liquidated amount to vacate the judgment.

d.

The judgment creditor retains a statutory lien against the debtor.

A

Choice “a” is correct. Under Chapter 7, a discharge discharges most debts of a debtor, whether or not there is a bankruptcy estate from which to pay the debts.

Choices “b”, “d”, and “c” are incorrect, per the above.

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2
Q

A family farmer with regular annual income may file a voluntary petition for bankruptcy under any of the following Chapters of the federal Bankruptcy Code, except:

a.

13

b.

11

c.

7

d.

9

A

Choice “d” is correct. Chapter 9 is for municipal debt adjustment; a family farmer cannot seek relief under this chapter.

Choice “c” is incorrect. Chapter 7 provides for liquidation of a debtor’s estate. A family farmer with regular income may seek relief under Chapter 7.

Choice “b” is incorrect. Chapter 11 is for debt reorganization and is available to family farmers with regular income.

Choice “a” is incorrect. Chapter 13 is for adjustment of debts of individuals with regular income and is available to a family farmer with regular income.

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3
Q

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.

Wages earned by the debtor within one year after the filing of the petition.

b.

Inheritances received by the debtor within 180 days after the filing of the petition.

c.

Social Security payments received by the debtor within 180 days after the filing of the petition.

d.

Child support payments received by the debtor within one year after the filing of the petition.

A

Explanation

Choice “b” is correct. The estate includes income generated from estate property and property the debtor receives from a bequest, devise, inheritances, property settlement, divorce, or beneficial interest in life insurance within 180 days after filing of the petition.

Choices “d”, “c”, and “a” are incorrect, per the above. The income described in these choices does not become part of the bankruptcy estate.

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4
Q

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 after the filing of the petition.

b.

Alimony received by the debtor within one year after the filing of the petition.

c.

Gifts received by the debtor within one year after the filing of the petition.

d.

Social Security payments received by the debtor within 180 days after the filing of the petition.

A

Choice “a” is correct. The bankruptcy estate includes property the debtor receives from a bequest, devise, inheritance, property settlement, divorce decree or beneficial interest in a life insurance policy or death benefit plan within 180 days after the filing of the petition. In addition, the estate includes any income generated by estate property (rents, interest and dividends) after the petition is filed. Earned income after the case commences is generally excluded.

Choice “b” is incorrect. Alimony, support or maintenance is exempt property.

Choice “d” is incorrect. Government benefits, such as social security, veterans benefits, unemployment comp. and disability, are exempt property.

Choice “c” is incorrect. Certain gifts received within 180 days after the petition is filed are included within the estate, but the one-year period here too long.

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5
Q

Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.

Dart has not been paying its business debts as they became due, has defaulted on its mortgage loan payments, and owes back taxes to the IRS. The total cash value of Dart’s bankruptcy estate after the sale of all assets and payment of administration expenses is $104,000.

Dart has the following creditors:

Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart’s real property. The property was valued at and sold, in bankruptcy, for $70,000.

The IRS has a $12,000 recorded judgment for unpaid corporate income tax.

JOG Office Supplies has an unsecured claim of $2,000 that was timely filed.

Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.

Decoy Publications has a claim of $20,000, of which $2,000 is secured by Dart’s inventory that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.

Which of the following creditors must join in the filing of the involuntary petition?

I.

JOG Office Supplies

II.

Nanstar Electric Co.

III.

Decoy Publications.

a.

II & III.

b.

III only.

c.

I, II, & III.

d.

I & II.

A

Choice “b” is correct. If a person has fewer than 12 creditors, any one or more of them with unsecured and undisputed claims that aggregate at least $15,325 more than the value of any collateral securing the claim may file the petition. Decoy Publications has a claim for $18,000 beyond its security. JOG Office Suppliers’ claim is for $2,000, not enough by itself to justify filing and unnecessary if Decoy files. Similarly, Nanstar is owed only $1,200, not enough by itself to justify filing and unnecessary if Decoy files.

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6
Q

Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.

Dart has not been paying its business debts as they became due, has defaulted on its mortgage loan payments, and owes back taxes to the IRS. The total cash value of Dart’s bankruptcy estate after the sale of all assets and payment of administration expenses is $104,000.

Dart has the following creditors:

Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart’s real property. The property was valued at and sold, in bankruptcy, for $70,000.

The IRS has a $12,000 recorded judgment for unpaid corporate income tax.

JOG Office Supplies has an unsecured claim of $2,000 that was timely filed.

Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.

Decoy Publications has a claim of $20,000, of which $2,000 is secured by Dart’s inventory that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.

Which of the following statements would correctly describe the result of Dart’s opposing the petition?

a.

Dart will win because there are not more than 12 creditors.

b.

Dart will win because the petition should have been filed under Chapter 11.

c.

Dart will lose because of its debt to the IRS.

d.

Dart will lose because it is not paying its debts as they become due.

A

Choice “d” is correct. A person may be petitioned involuntarily into bankruptcy if that person is not paying debts as they become due.

Choice “b” is incorrect. Chapter 7 liquidations are available to liquidate a business. Chapter 11 is used only to restructure debt.

Choice “a” is incorrect. If a debtor has fewer than 12 creditors, any one creditor owed more than $15,325 of unsecured debt can petition the debtor into bankruptcy.

Choice “c” is incorrect. There is no special provision prohibiting opposition to an involuntary bankruptcy petition merely because one creditor is the IRS.

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7
Q

Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.

Dart has not been paying its business debts as they became due, has defaulted on its mortgage loan payments, and owes back taxes to the IRS. The total cash value of Dart’s bankruptcy estate after the sale of all assets and payment of administration expenses is $104,000.

Dart has the following creditors:

Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart’s real property. The property was valued at and sold, in bankruptcy, for $70,000.

The IRS has a $12,000 recorded judgment for unpaid corporate income tax.

JOG Office Supplies has an unsecured claim of $2,000 that was timely filed.

Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.

Decoy Publications has a claim of $20,000, of which $2,000 is secured by Dart’s inventory that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.

Which of the following events will follow the filing of the Chapter 7 involuntary petition?

~~A trustee will be appointed
~~A stay against creditor collection proceedings will go into effect
a.

No

Yes

b.

No

No

c.

Yes

Yes

d.

Yes

No

A

Choice “c” is correct. In a liquidation proceeding, after the petition is filed, a trustee will be appointed, and unless within twenty days after the filing of the creditor’s petition the debtor objects to the petition, an automatic stay against creditor collection proceedings goes into effect. On the other hand, if the debtor files the petition, the automatic stay takes effect on the date of the filing.

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8
Q

Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.

Dart has not been paying its business debts as they became due, has defaulted on its mortgage loan payments, and owes back taxes to the IRS. The total cash value of Dart’s bankruptcy estate after the sale of all assets and payment of administration expenses is $104,000.

Dart has the following creditors:

Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart’s real property. The property was valued at and sold, in bankruptcy, for $70,000.

The IRS has a $12,000 recorded judgment for unpaid corporate income tax.

JOG Office Supplies has an unsecured claim of $2,000 that was timely filed.

Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.

Decoy Publications has a claim of $20,000, of which $2,000 is secured by Dart’s inventory that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.

Assume that the bankruptcy estate was distributed.

What dollar amount would Nanstar Electric Co. receive?

a.

$0

b.

$800

c.

$1,000

d.

$1,200

A

Choice “a” is correct. Nanstar’s claim was not timely filed. Late claims are paid only if there is money left over after the general unsecured creditors whose claims were timely filed are paid.

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9
Q

Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.

Dart has not been paying its business debts as they became due, has defaulted on its mortgage loan payments, and owes back taxes to the IRS. The total cash value of Dart’s bankruptcy estate after the sale of all assets and payment of administration expenses is $104,000.

Dart has the following creditors:

Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart’s real property. The property was valued at and sold, in bankruptcy, for $70,000.

The IRS has a $12,000 recorded judgment for unpaid corporate income tax.

JOG Office Supplies has an unsecured claim of $2,000 that was timely filed.

Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.

Decoy Publications has a claim of $20,000, of which $2,000 is secured by Dart’s inventory that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.

Assume that the bankruptcy estate was distributed.

What total dollar amount would Fracon Bank receive on its secured and unsecured claims?

a.

$72,000

b.

$75,000

c.

$74,000

d.

$70,000

A

Choice “c” is correct. With respect to distributing assets from a bankruptcy estate, all secured claims are first paid; then priority claims are paid; and finally the remaining assets are split proportionally among the unsecured creditors who have timely filed a claim. Thus, Fracon Bank is entitled to the $70,000 secured by the mortgage, and Decoy is entitled to its $2,000 security interest first. The IRS has a priority claim for $12,000, which will be paid next. Only $20,000 remains to pay the unsecured debts which total $25,000 ($5,000 remaining on the Fracon Bank debt; $2,000 to JOG; $18,000 to Decoy; Nanstar does not share in the distribution because Nanstar failed to file a claim). The unsecured creditors will share in the remainder of the estate proportionally. So, in addition to the $70,000 from the sale of the mortgaged property, Fracon is entitled to $4,000, which is 5/25 ($5,000/$25,000) of the $20,000 remaining in the estate. The total Dart will receive is $74,000: $70,000 + $4,000.

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10
Q

Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition.

Dart has not been paying its business debts as they became due, has defaulted on its mortgage loan payments, and owes back taxes to the IRS. The total cash value of Dart’s bankruptcy estate after the sale of all assets and payment of administration expenses is $104,000.

Dart has the following creditors:

Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart’s real property. The property was valued at and sold, in bankruptcy, for $70,000.

The IRS has a $12,000 recorded judgment for unpaid corporate income tax.

JOG Office Supplies has an unsecured claim of $2,000 that was timely filed.

Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.

Decoy Publications has a claim of $20,000, of which $2,000 is secured by Dart’s inventory that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.

For the next item assume that the bankruptcy estate was distributed.

What dollar amount would the IRS receive?

a.

$10,000

b.

$8,000

c.

$12,000

d.

$0

A

Choice “c” is correct. With respect to the distribution of a bankruptcy estate’s assets, first all secured claims are paid; then priority claims are paid; and finally the remaining assets are split proportionally among the unsecured creditors who have timely filed a claim. Thus, Fracon Bank is entitled to the $70,000 secured by the mortgage, and Decoy is entitled to its $2,000 security interest first. After the bankruptcy estate paying these two secured creditors, $32,000 remains. The IRS has the only priority claim for $12,000. So that claim will be paid next in full.

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11
Q

Strong Corp. filed a voluntary petition in bankruptcy under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code. A reorganization plan was filed and agreed to by all necessary parties. The court confirmed the plan and a final decree was entered.

Which of the following parties ordinarily must confirm the plan?

~~1/2 of the secured creditors
~~2/3 of the shareholders
a.

No

No

b.

Yes

Yes

c.

No

Yes

d.

Yes

No

A

Choice “a” is correct. Technically, only the court can confirm a plan; creditors and security interest holders vote whether to accept the plan. Moreover, unimpaired parties, such as secured creditors are presumed to have affirmed, so their vote is not necessary. A plan need not be affirmed by 2/3 of interested shareholders (called “equity security holders” under the Bankruptcy Code), but rather by 2/3 of the interests (e.g., 2/3 of the outstanding shares, which may be held by fewer than 2/3 of the shareholders). Finally, through the “cram down” provision of the Bankruptcy Code a plan may be confirmed by a court even if only one impaired class votes to affirm the plan.

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12
Q

Strong Corp. filed a voluntary petition in bankruptcy under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code. A reorganization plan was filed and agreed to by all necessary parties. The court confirmed the plan and a final decree was entered.

Which of the following statements best describes the effect of the entry of the court’s final decree?

a.

Strong Corp. will be discharged only from the debts owed creditors who agreed to the reorganization plan.

b.

Strong Corp. will be discharged from all its debts and liabilities that arose before the date of confirmation of the plan.

c.

Strong Corp. will be discharged from all its debts and liabilities.

d.

Strong Corp. will be discharged from all its debts and liabilities that arose before the confirmation of the plan, except as otherwise provided in the plan, the order of confirmation, or the Bankruptcy Code.

A

Choice “d” is correct. Under the Bankruptcy Code, the court’s final decree results in a discharge of all debts and liabilities that arose before confirmation of the plan, except as otherwise provided in the plan, the order of confirmation, or the Bankruptcy Code.

Choices “c” and “b” are incorrect. Nondischargeable debts are not discharged by the reorganization.

Choice “a” is incorrect. The discharge is effective even against creditors who voted against the plan.

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13
Q

Deft, CPA, is an unsecured creditor of Golf Co. for $16,000. Golf has a total of 10 creditors, all of whom are unsecured. Golf has not paid any of the creditors for three months. Under Chapter 11 of the Federal Bankruptcy Code, which of the following statements is correct?

a.

Three unsecured creditors must join in the involuntary petition in bankruptcy.

b.

Golf may not be petitioned involuntarily into bankruptcy because there are less than 12 unsecured creditors.

c.

Golf may not be petitioned involuntarily into bankruptcy under the provisions of Chapter 11.

d.

Deft may file an involuntary petition in bankruptcy against Golf.

A

Choice “d” is correct. When there are fewer than 12 unsecured creditors, any one creditor who is owed $15,325 in unsecured debt or more may file an involuntary petition in bankruptcy.

Choice “b” is incorrect. The fact that there are fewer than 12 unsecured creditors means that only one creditor is needed for the involuntary petition (as long as the creditor is owed at least $15,325 in unsecured debt).

Choice “c” is incorrect. A debtor who is not paying debts as they become due is subject to being involuntarily petitioned into bankruptcy under the provisions of Chapter 11.

Choice “a” is incorrect. When there are fewer than 12 unsecured creditors, any one or more of the creditors may file the involuntary petition, but the petitioner(s) must be owed in aggregate at least $15,325 in unsecured debt.

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14
Q

Which of the following claims will not be discharged in bankruptcy?

a.

A claim that arises from alimony or maintenance.

b.

A claim brought by a secured creditor that remains unsatisfied after the sale of the collateral.

c.

A claim brought by a judgment creditor whose judgment resulted from the debtor’s negligent operation of a motor vehicle.

d.

A claim that arises out of the debtor’s breach of a contract.

A

Choice “a” is correct. Money owed as alimony is not discharged in bankruptcy.

Choice “d” is incorrect. Contract claims are dischargeable in bankruptcy.

Choice “b” is incorrect. Debts owed to secured creditors beyond the value of the collateral are treated like any other unsecured debt and are discharged by the bankruptcy.

Choice “c” is incorrect. Debts arising from negligent conduct are dischargeable in bankruptcy (if the auto accident arose from drunk driving or the injuries were willful, the debt would not be discharged).

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15
Q

Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, which of the following statements applies to a person who has voluntarily filed for and received a discharge in bankruptcy?

a.

The person will be discharged from all debts.

b.

The person is precluded from owning or operating a similar business for two years.

c.

The person must surrender for distribution to the creditors amounts received as an inheritance, if the receipt occurs within 180 days after filing the bankruptcy petition.

d.

The person can obtain another voluntary discharge in bankruptcy under Chapter 7 after three years have elapsed from the date of the prior filing.

A

Choice “c” is correct. The bankruptcy estate is deemed to include money inherited within 180 days after the bankruptcy petition is filed.

Choice “a” is incorrect. Not all debts are discharged by a bankruptcy. For example, alimony is not discharged, and neither are debts arising from fraud.

Choice “d” is incorrect. After a Chapter 7 bankruptcy, the debtor may not obtain another bankruptcy for eight years.

Choice “b” is incorrect. There is no limitation on the types of businesses a debtor may own after bankruptcy.

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16
Q

Under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code, after a reorganization plan is confirmed, and a final decree closing the proceedings entered, which of the following events usually occurs?

a.

A reorganized corporate debtor will be discharged from all debts except as otherwise provided in the plan and applicable law.

b.

A trustee will continue to operate the debtor’s business.

c.

A reorganized individual debtor will not be allowed to continue in the same business.

d.

A reorganized corporate debtor will be liquidated.

A

Choice “a” is correct. After the reorganization plan is confirmed, the debtor is released from debts except as provided in the plan or by law.

Choice “d” is incorrect. The goal of a reorganization is to allow the debtor’s business to continue; the business is not dissolved at the conclusion of the bankruptcy proceedings.

Choice “b” is incorrect. Generally in a reorganization the debtor remains in possession and there is no trustee. In any event, a trustee would not be left in place after the reorganization is complete. The goal of Chapter 11 is to allow the debtor’s business to continue.

Choice “c” is incorrect. The goal of a reorganization is just the opposite: to allow the debtor’s business to continue.

17
Q

The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code:

a.

Stops the enforcement of judgment liens against property in the bankruptcy estate.

b.

Terminates all security interests in property in the bankruptcy estate.

c.

Terminates liens on exempt property.

d.

Stops the debtor from incurring new debts.

A

Choice “a” is correct. The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor.

Choice “c” is incorrect. The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor. The filing does not terminate liens, but merely stays them (i.e., temporarily prevents their enforcement).

Choice “b” is incorrect. The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor. The filing does not terminate security interests but rather merely stays them (i.e., temporarily prevents their enforcement).

Choice “d” is incorrect. The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor. The filing does not prevent the debtor from incurring new debts.

18
Q

Which of the following requirements must be met for creditors to file an involuntary bankruptcy petition under Chapter 7 of the Federal Bankruptcy Code?

a.

The debtor has not been paying its bona fide debts as they become due.

b.

At least one fully secured creditor must join in the petition.

c.

There must not be more than 12 creditors.

d.

The debtor must owe one creditor more than $5,000.

A

Choice “a” is correct. An involuntary petition for bankruptcy can be filed if a debtor owes more than $14,425 in unsecured debt and is not paying its debts as they become due.

Choice “d” is incorrect. The debtor must owe at least $14,425 because the petition must be filed by unsecured creditors owed at least that much, but creditors can aggregate their claims. There is no requirement that the debtor owe one creditor $5,000.

Choice “c” is incorrect. There can be more than 12 creditors. If there are, at least three must join in the petition.

Choice “b” is incorrect. There is no requirement of a secured creditor joining in the petition. In fact, a secured creditor cannot be counted as one of the required petitioners to the extent that the security covers the obligation owed.

19
Q

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
a.

No

No

b.

No

Yes

c.

Yes

Yes

d.

Yes

No

A

Choice “a” is correct. A debtor need not be insolvent to file a voluntary petition under Chapter 7. Although the debtor’s income may not exceed certain specified levels, insolvency is not a requirement. Additionally, there is no requirement of 3 creditors in a voluntary petition. An involuntary petition requires at least 3 creditors to file if the debtor has 12 or more creditors.

20
Q

Which of the following transfers by a debtor, within ninety days of filing for bankruptcy, could be set aside as a preferential payment?

a.

Paying a business utility bill.

b.

Making a gift to charity.

c.

Borrowing money from a bank secured by giving a mortgage on business property.

d.

Prepaying an installment loan on inventory.

A

Choice “d” is correct. A transfer of the debtor’s property to or for the benefit of a creditor for an antecedent debt at a time when the debtor was insolvent and within 90 days of filing the bankruptcy petition constitutes a preference if the transfer gives the transferee more than the transferee would have obtained under the Bankruptcy Code. Prepayment of an installment loan falls within this description. This transaction does not qualify for the exception for payment of ordinary business because the prepayment is not under the usual terms of the contract.

Choice “b” is incorrect. Although the gift to the charity here is voidable, it is voidable as a fraudulent transfer (a trustee in bankruptcy has the power to void transfers of property where the debtor did not receive reasonably equivalent value). This transaction is not a preference because a preference occurs where there is a payment of an antecedent debt.

Choice “a” is incorrect. A transfer is not voidable as a preference to the extent that it was made in the ordinary course of the business of the debtor, according to the ordinary business terms, and for the purpose of repaying a debt incurred in the ordinary course of the debtor’s business. Payment of a utility bill falls within this exception.

Choice “c” is incorrect. A transfer is not voidable by the trustee where there is a contemporaneous exchange for value. Here, money was given in exchange for the mortgage.

21
Q

Which of the following acts by a debtor could result in a bankruptcy court revoking the debtor’s discharge?

I.

Failure to list one creditor.

II.

Failure to answer correctly material questions on the bankruptcy petition.

a.

Neither I nor II.

b.

I only.

c.

Both I and II.

d.

II only.

A

Choice “d” is correct. Bankruptcy Code section 727(d) sets out the reasons for revoking a discharge. The grounds include failing to answer a material question on the bankruptcy petition if the question has been approved by the court, unless the fifth amendment privilege against self-incrimination is appropriately claimed. Thus, II could be a ground for revocation. The grounds do not include failure to list one creditor. Thus, I is not a possible ground.

22
Q

Robin Corp. incurred substantial operating losses for the past three years. Unable to meet its current obligations, Robin filed a petition for reorganization under Chapter 11 of the Federal Bankruptcy Code. Which of the following statements is correct?

a.

The reorganization plan may only be filed by Robin.

b.

A creditors’ committee, if appointed, will consist of unsecured creditors.

c.

The creditors’ committee must select a trustee to manage Robin’s affairs.

d.

Robin may continue in business only with the approval of a trustee.

A

Choice “b” is correct. The creditors’ committee, if appointed, is made up of unsecured creditors.

Choice “c” is incorrect. A trustee usually is not appointed in a reorganization.

Choice “a” is incorrect. Robin has a right to file the first plan of reorganization, but creditors can also file a plan.

Choice “d” is incorrect. In a reorganization there is a presumption that the debtor will remain in possession.

23
Q

A reorganization under Chapter 11 of the Federal Bankruptcy Code requires all of the following, except the:

a.

Opportunity for each class of claims to accept the reorganization plan.

b.

The filing of a reorganization plan.

c.

Confirmation of the reorganization plan by the court.

d.

Liquidation of the debtor.

A

Choice “d” is correct. There is no requirement of liquidation in a reorganization.

Choice “b” is incorrect. In a reorganization a plan of reorganization must be filed.

Choice “c” is incorrect. In a reorganization the plan of reorganization must be approved by the court.

Choice “a” is incorrect. In a reorganization each class of claimants has an opportunity to accept the plan (although it need not be accepted by all classes, such as unimpaired classes of security holders).

24
Q

Which of the following statements is correct with respect to the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code?

a.

The debtor must be insolvent if the bankruptcy petition was filed voluntarily.

b.

The commencement of a bankruptcy case may be voluntary or involuntary.

c.

A trustee must always be appointed.

d.

A reorganization plan may be filed by a creditor anytime after the petition date.

A

Choice “b” is correct. Under Bankruptcy Code Section 303, creditors may petition a debtor involuntarily into a Chapter 11 bankruptcy reorganization proceeding.

Choice “c” is incorrect. The general rule in a reorganization is that a trustee is not appointed.

Choice “a” is incorrect. There is no requirement of insolvency for filing a voluntary reorganization petition.

Choice “d” is incorrect. A creditor must wait 120 days to file a plan unless a trustee has been appointed.

25
Q

Which of the following types of claims would be paid first in the distribution of a bankruptcy estate under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code if the petition was filed July 15, Year 3?

a.

Federal tax lien filed June 30, Year 3.

b.

Employee wages due April 30, Year 3.

c.

Inventory purchased and delivered August 1, Year 3.

d.

A secured debt properly perfected on March 20, Year 3.

A

Choice “d” is correct. All perfected security interests are paid first. Since the security interest here was filed more than 90 days before the bankruptcy, this event does not constitute a voidable preference.

Choice “c” is incorrect. The creditor is either an involuntary case gap creditor (third priority) or a creditor with a disallowed post-petition claim; the facts are unclear. In either case, a secured creditor would have priority.

Choice “b” is incorrect. Wage claims for wages earned within 180 days of the bankruptcy have a fourth priority. Older wage claims are treated as general unsecured claims and are paid last. In either case, the wage claims are subordinate to a perfected security interest.

Choice “a” is incorrect. If the federal government obtains a lien for taxes against the debtor’s estate before the bankruptcy petition is filed, the federal tax lien is treated as a secured interest. However, this interest is subordinate to the March 20 secured claim because the March 20 interest was perfected before the tax lien attached.

26
Q

Under the federal Bankruptcy Code, which of the following rights or powers does a trustee in bankruptcy nothave?

a.

The right to use any grounds available to the debtor to obtain the return of the debtor’s property.

b.

The right to avoid any statutory liens against the debtor’s property that were effective before the filing of the bankruptcy petition.

c.

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.

d.

The power to prevail against a creditor with an unperfected security interest.

A

Choice “b” is correct. A trustee in bankruptcy is treated as a hypothetical lien creditor on all of the debtor’s property as of the date the bankruptcy petition is filed. The trustee is subordinate to all prior perfected security interests, including statutory liens that were effective prior to the filing of the bankruptcy petition.

Choice “d” is incorrect. An unperfected security interest would be unprotected against other 3rd parties who had a valid interest in the debtor’s property, including the trustee in bankruptcy, because the trustee is treated as a lien creditor as of the date the petition is filed, and a lien creditor prevails against an unperfected security interest.

Choice “c” is incorrect. The trustee in bankruptcy is treated as a lien creditor in the debtor’s property as of the date of the filing for bankruptcy. Thus, like any secured creditor, the trustee would have the power to force persons holding the debtor’s property to deliver it to the trustee.

Choice “a” is incorrect. Since the trustee becomes a lien creditor in the debtor’s property as of the date of the filing, the trustee would have the same rights the debtor would have to obtain the return of the debtor’s property.

27
Q

On April 1, Roe borrowed $100,000 from Jet to pay Roe’s business expenses. On June 15, Roe gave Jet a signed security agreement and financing statement covering Roe’s inventory. Jet immediately filed the financing statement. On July 1, Roe filed for bankruptcy. Under the federal Bankruptcy Code, can Roe’s trustee in bankruptcy set aside Jet’s security interest in Roe’s inventory?

a.

No, because the security interest was perfected before Roe filed for bankruptcy.

b.

Yes, because a security agreement may only cover goods actually purchased with the borrowed funds.

c.

No, because the loan proceeds were used for Roe’s business.

d.

Yes, because Roe giving the security interest to Jet created a voidable preference.

A

Choice “d” is correct. A trustee in bankruptcy has the power to set aside preferences, which generally may be defined as a transfer that: (i) is made for the benefit of a creditor on account of an antecedent debt, (ii) is made within 90 days of the filing of the bankruptcy petition, (iii) is made while the debtor was insolvent (presumed within the 90-day period), and (iv) enables the creditor to get more than the creditor would have received in the bankruptcy proceeding. Here, the loan was made on April 1, creating a debt as of that date. The security interest was given on June 15. So, all four requirements are present, and the security interest can therefore be set aside by the trustee.

Choice “b” is incorrect. A security interest can be taken in any of a debtor’s property. There is no requirement that the goods covered be purchased with the funds borrowed. However, a security interest in such goods does have a special name: a purchase money security interest.

Choice “a” is incorrect. Although the security interest was perfected through filing before the bankruptcy petition was filed, the security interest nevertheless constitutes a preference because within 90 days of the filing of the bankruptcy petition the security interest was given on account of an antecedent debt and was made while the debtor was insolvent (presumed within the 90-day period).

Choice “c” is incorrect. There is no such exemption under preference law. The security interest constitutes a preference because within 90 days of the filing of the bankruptcy petition the security interest was given on account of an antecedent debt and was made while the debtor was insolvent (presumed within the 90-day period).

28
Q

Which, if any, of the following statements are true under Chapter 15 of the United States Bankruptcy Code?

I.

A foreign entity may file only under Chapter 15.

II.

The automatic stay is not available under Chapter 15.

a.

I only.

b.

II only.

c.

I and II.

d.

Neither I nor II.

A

Explanation

Choice “d” is correct. A foreign entity may file an ancillary proceeding under Chapter 15, and may also file a proceeding under Chapter 7 or Chapter 11. Thus, I is not true. The automatic stay arises after a petition for recognition is granted by the court. Thus, II is not true.

29
Q

Which of the following statements is not true under Chapter 15 of the United States Bankruptcy Code?

a.

Discrimination against foreign interests is never allowed.

b.

A foreign representative may operate the debtor’s business in the U.S.

c.

U.S. courts have an affirmative duty to cooperate with foreign courts.

d.

A foreign representative may participate in other U.S. bankruptcy cases pending against the represented debtor.

A

Choice “a” is correct. This statement is not true. Although discrimination against foreign interests generally is prohibited, discrimination is allowed with regard to certain foreign government tax liens. All of the other statements are true.

30
Q

Which of the following requirements must be met for creditors to file an involuntary bankruptcy petition under Chapter 7 of the Federal Bankruptcy Code?

a.

The debtor has not been paying its bona fide debts as they become due.

b.

At least one fully secured creditor must join in the petition.

c.

There must not be more than 12 creditors.

d.

The debtor must owe one creditor more than $5,000.

A

Choice “a” is correct. An involuntary petition for bankruptcy can be filed if a debtor owes more than $15,325 in unsecured debt and is not paying its debts as they become due.

Choice “d” is incorrect. The debtor must owe at least $15,325 to all of the unsecured creditors. There is no requirement that one creditor be owed any specified amount.

Choice “c” is incorrect. There can be more than 12 creditors. If there are more than 12 creditors, at least 3 must join together in filing the petition.

Choice “b” is incorrect. There is no requirement that a secured creditor join in the petition.

31
Q

Karen sells her one-year-old sports car to her mother for $100. The next week, Karen files for bankruptcy under Chapter 7. Regarding the sale of the car, the trustee may:

a.

Not cancel it because it is a sale, not a gift.

b.

Cancel it as a fraudulent transfer.

c.

Not cancel it, but can sue Karen’s mother for return of the $100.

d.

Cancel it as a voidable preference.

A

Choice “b” is correct. Transfers made within two years of the filing date with an intent to hinder, delay, or defraud creditors or any transfer where the debtor received less than equivalent value while the debtor was insolvent are fraudulent transfers and may be set aside by the trustee. A one year old car typically is worth far more than $100, and because Karen filed for bankruptcy the next week, she likely was insolvent when she made the transfer.

Choice “d” is incorrect. A voidable preference is a transfer made to benefit one creditor over other creditors on account of an antecedent debt. Karen’s mother was not a creditor (i.e., no antecedent debt was involved).

Choice “a” is incorrect. Although the transfer was a sale, the trustee can set a sale aside if the debtor did not receive equivalent value from the sale.

Choice “c” is incorrect. This choice makes no sense, as Karen’s mother presumably paid Karen $100 and did receive money to “return”. In any case, the trustee is empowered to set aside the transfer and obtain a court order to gain the property back from Karen’s mother.