REG 17 - Bankruptcy

Question 1

A party involuntarily petitioned into bankruptcy under Chapter 7 of the Federal Bankruptcy Code who succeeds in having the petition dismissed could recover
I. Court costs and attorney’s fees
II. Compensatory damages
III. Punitive damages

Answer 1

I, II, and III. The Code is potentially harsh on creditors who wrongfully file an involuntary petition, especially if it is done to harass the debtor. In such a case, the debtor can recover court costs and reasonable attorney’s fees, as well as compensatory and possibly even punitive damages.

Question 2

A voluntary petition filed under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code
A. Is not available to a corporation unless it has previously filed a petition under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code.
B. Automatically stays collection actions against the debtor except by secured creditors.
C. Will be dismissed unless the debtor has 12 or more unsecured creditors whose claims total at least $5,000.
D. Does not require the debtor to show that the debtor’s liabilities exceed the fair market value of assets.

Answer 2

D. This is balance sheet insolvency, and the debtor does not have to make such a showing. So long as the debtor is not abusing the bankruptcy relief laws, the debtor may file for Chapter 7 protection.

Question 3

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 3

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 4

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.

Answer 4

D. 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.

Question 5

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.

Answer 5

D. 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.

Question 6

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?
I. Insolvency
II. Three or more creditors

Answer 6

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 7

Unger owes a total of $50,000 to eight unsecured creditors and one fully secured creditor. Quincy is one of the unsecured creditors and is owed $6,000. Quincy has filed an involuntary bankruptcy petition against Unger under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Unger has been unable to pay debts as they become due. Unger’s liabilities exceed Unger’s assets. Unger has filed papers opposing the bankruptcy petition.

Which of the following statements regarding Quincy’s petition is correct?
A. It will be dismissed because the secured creditor failed to join in the filing of the petition.
B. It will be dismissed because three unsecured creditors must join in the filing of the petition.
C. It will be granted because Unger’s liabilities exceed Unger’s assets.
D. It will be dismissed because Unger’s debt to Quincy alone is less than the required limit to bring an involuntary petition.

Answer 7

D. An involuntary petition may succeed if the aggregate unsecured claims of the petitioners equals or exceeds $13,425. Quincy’s claim of $6000 alone does meet that limit.

Question 8

T/F: Jim owns a house he lives in, drives a new car, and has purchased some new furniture and clothing. The total equity value of this property is $150,000. Jim runs into Jane’s car, causing damages and injury to Jane in the amount of $150,000. Jane can get a judgment against Jim for at least $150,000, and can satisfy the judgment by a writ levy on all of the above property.

Answer 8

False.

frequently many of the assets of individuals are exempt from collection of a judgment.

Question 9

T/F: A creditor can garnish a debtor’s wages, but cannot garnish bank accounts of the debtor.

Answer 9

False.
A creditor cannot directly garnish wages.

Garnishment is a court order requiring third parties (garnishees) to deliver a debtor’s property held in their possession, or to pay debts they owe to the debtor to the creditor to satisfy a debt or judgment.

Question 10

T/F: Before the bankruptcy court will grant an order for relief for a Chapter 7 bankruptcy petition, a hearing must be held.

Answer 10

False.
No hearing is required for a Chapter 7 bankruptcy petition. Either voluntary or involuntary petitions are allowed under Chapter 7.

Question 11

T/F: A farmer who receives 80% or more of his or her gross income from a farming operation can voluntarily petition him or herself into a Chapter 7 bankruptcy, but the farmer’s creditors cannot force the farmer into bankruptcy by filing an involuntary petition.

Answer 11

True

Question 12

T/F: A bank may voluntarily petition itself into a Chapter 7 bankruptcy, but creditors cannot involuntarily petition a bank into a Chapter 7 bankruptcy.

Answer 12

False.

Banks are not eligible for Chapter 7 bankruptcy.

Question 13

T/F: Before a corporation can voluntarily file a Chapter 11 petition into bankruptcy, it must be insolvent under the Bankruptcy Code.

Answer 13

False.
Not necessarily.
Notice that the standard for involuntary bankruptcy is not proving that liabilities are greater than assets; i.e., insolvency in the accounting sense is not the test for the validity of an involuntary petition. The standard is the inability to pay debts as they become due.

Question 14

T/F: An individual must be insolvent to file a Chapter 7 petition in bankruptcy.

Answer 14

False.
No, they don’t have to be insolvent, where their liabilities are greater than their assets. They merely are unable to pay their debts as they become due. And they must receive credit counseling from an approved nonprofit agency within 180 days prior to the date of filing.

Question 15

T/F: In both a writ of attachment and a writ of execution, only nonexempt property of the debtor can be seized to satisfy the debt.

Answer 15

True

Question 16

T/F: Daniel is a debtor and owes the following unsecured non-contingent debts: Susan $9,500, Harry $3,000, Janet $3,000, Roger $500, Sally $400, Jim $300, and seven other creditors, each with claims of $100. Daniel does have property in other states, but none of the creditors can get a personal judgment against Daniel to file writs of execution and levy on this property. An involuntary petition is considered by some of the debtors as a means of getting access to the property. Only Susan, Harry, and Janet are required to sign the petition.

Answer 16

True

Question 17

T/F: John has 11 unsecured creditors with non-contingent claims. He owes Smith the largest amount, $2,000. All other creditor claims are under $600. John cannot be forced involuntarily into a Chapter 7 bankruptcy even if all creditors are willing to sign the petition.

Answer 17

True

Question 18

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 18

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 19

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 19

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 20

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 20

D. 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 21

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.

• On July 1, 2004, Hall paid off an outstanding credit card balance of $500. The original debt had been $2,500.

The credit card payment was
A. Preferential, because the payment was made within 90 days of the filing of the petition.
B. Preferential, because the payment was on account of an antecedent debt.
C. Not preferential, because the payment was for a consumer debt of less than $5,000 ($5,475 after August 2007).
D. Not preferential, because the payment was less than 40% of the original debt.

Answer 21

C. This looks like a preferential payment, but is not, because it falls within an exception to the general rule. Consumer debts of up to $5,475 may be made without showing a preference, as can alimony and child support payments.
If the payment were $5,475 or more, then the 90-day rule would make the payment preferential, because the credit card balance was an antecedent debt, or one that existed when the bankruptcy was filed.

Question 22

T/F: Unless a state has limited a bankrupt debtor to use of state-exemption statutes, the debtor can chose either the state or federal-exemption statutes.

Answer 22

True

Question 23

T/F: On June 1, Sue files a Chapter 7 bankruptcy petition. On July 1, Sue inherits $500,000 from her uncle. Because the $500,000 is received by Sue after she has filed her petition, this money is not part of Sue’s bankrupt estate, and is thus not available to her listed unsecured creditors.

Answer 23

False.
The debtor’s estate includes the following after-acquired property that is acquired within 180 days after the petition is filed:
1. property by inheritance or gift
2. property by divorce, separation, or property settlement
3. beneficiary proceeds from a life insurance policy

Question 24

T/F: In a Chapter 7 bankruptcy, a trustee can set aside any fraudulent transfers if made within one year of the filing of the petition.

Answer 24

True

Question 25

T/F: A debtor can choose to claim certain property as exempt from the bankruptcy proceedings under state law.

Answer 25

True

Question 26

T/F: Jim is a young lawyer who has just started his practice. He inherited from his father a law library. To get financial resources to start his legal practice, Jim put up his law library (professional books) as collateral for a $2,500 loan from a friend. Jim signs a security agreement giving his friend a non-possessory, non-purchase money security interest in the books, which the friend perfects. If Jim goes into bankruptcy, Jim can avoid the perfected lien and the friend will be treated as an unsecured general creditor.

Answer 26

True

Question 27

T/F: Joan is in automobile accident caused by Smith. She receives a judgment for her bodily injuries for $12,000. Joan cannot work, is in severe debt, and files a petition for a Chapter 7 bankruptcy. The judgment is unpaid. The trustee has a right to include the judgment money claim as part of her estate assets, collect the $12,000, and distribute the money to creditors.

Answer 27

False.

Money in a claim that is unpaid cannot be included.

Question 28

T/F: A bank director’s repayment of a loan made while solvent 120 days prior to filing for bankruptcy would be a voidable preference.

Answer 28

True

Question 29

T/F: Homer and Jeffery are partners. On February 1, Homer borrows $5,000 from the partnership to be paid back on or before December 1. On May 1, due to substantial gains Homer makes in selling some stock, Homer pays back the partnership the $5,000 loaned. Homer files for bankruptcy on December 10. The payment would be voidable as a preference.

Answer 29

True

Question 30

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 30

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.

Question 31

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 was sold to Acme for less than the balance due on the note .

Which of the following statements correctly describes Acme’s distribution from Master’s bankruptcy estate?
A. Acme will receive the total amount it is owed, even if the proceeds from the sale of the collateral were less than the balance owed by Master.
B. Acme will have the same priority as unsecured general creditors, to the extent that the proceeds from the sale of its collateral are insufficient to satisfy the amount owed by Master.
C. The total proceeds from the sale of the collateral will be paid to Acme, even if they are less than the balance owed by Master, provided there is sufficient cash to pay all administrative costs associated with the bankruptcy.
D. Acme will receive only the proceeds from the sale of the collateral in full satisfaction of the debt owed by Master.

Answer 31

B. If this sale does not generate enough to cover the entire debt, then Acme becomes a general creditor for that portion of the debt. A perfected secured creditor only has a special priority right to the security interest, or collateral. When the collateral has been disposed of, it must wait in line for further payments with everyone else.

Question 32

T/F: A jewelry manufacturer prepays a semiprecious gem merchant $15,000 for gems to be delivered in two months. The gem merchant goes into a Chapter 7 bankruptcy. The jewelry manufacturer has a priority up to $5,000.

Answer 32

False.
As a consumer creditor, they would have a claim up to $2,775 and the amount over $2,775 would be treated as a general creditor claim.

Question 33

T/F: Joan is about to get married and has found the ideal wedding dress in a brochure. It will be tailor made for her after she sends her measurements and a deposit of $500 to Taylor. Before the wedding dress is made, Taylor goes into Chapter 7 bankruptcy. Taylor also owes money to an unsecured equipment manufacturer, an unsecured cloth manufacturer, and for an unsecured bank loan. Between these four creditors, Joan has first priority.

Answer 33

True

Question 34

T/F: West Bank is a secured creditor owed $15,000. M, Inc. is an unsecured creditor that is owed $7,000. West’s collateral is sold for $12,000. There are no taxes and no other creditors and after West receives its $12,000, there is $5,000 left to be distributed. M gets $3,500.

Answer 34

True

Question 35

T/F: John is the foreman of a landscape crew employed by Carla. He is paid $4,000 a month. Due to a recession, Carla’s business takes a downward turn. John has not been paid for March, April, May, June, or July. On August 1, Carla files for Chapter 7 bankruptcy. Carla’s bankrupt estate after liquidation is $22,000. Administrative costs of bankruptcy are $2,000. Carla’s estate is subject to creditor claims from John, an unsecured bank loan of $5,000, and a debt to a nursery of $10,000. Under priority of general creditor claims, John will receive his back wages of $20,000, and the bank and nursery zero dollars.

Answer 35

False.
When an employee claims for back wages, salaries, or commissions but limited to those earned within 90 days of the filing of the petition or cessation of business (whichever if first) to a maximum amount of $12,475.
* Any amount above the $12,475 is still a claim but for priority purposes goes to the last category - general creditors.

Question 36

In general, which of the following debts will be discharged under the voluntary-liquidation provisions of Chapter 7 of the Federal Bankruptcy Code?
A. A debt incurred owing to the negligence of the debtor, arising before the filing of the bankruptcy petition.
B. Alimony payments owed to the debtor’s spouse under a separation agreement entered into two years before the filing of the bankruptcy petition.
C. A debt incurred more than 90 days before the filing of the bankruptcy petition and not disclosed in the petition.
D. Income taxes due up to two years before the filing of the bankruptcy petition.

Answer 36

A. So long as the debt itself has arisen before the filing, it will usually be discharged if it is based on simple negligence. Note that debts arising involving intoxication are not discharged by a Chapter 7 proceeding.

A discharge releases the debtor from further liability of his or her debts.

Question 37

Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, a debtor will be denied a discharge in bankruptcy if the debtor
A. Fails to list a creditor.
B. Owes alimony and child support payments.
C. Cannot pay administration expenses.
D. Refuses satisfactorily to explain a loss of assets.

Answer 37

D. Generally, a bankrupt debtor, at the end of bankruptcy proceedings, will receive a discharge decree. Unless the debtor has committed an act such as fraud, intentional concealment of assets, refusal to explain the loss of assets, and the like, is a partnership or corporation, or the debtor has received a discharge decree within eight years of the current filing petition, the discharge decree will be granted. Here, the debtor has committed an act, has refused satisfactorily to explain a loss of assets, and as such will be denied a discharge decree in bankruptcy.

Question 38

Y/N: All reaffirmation agreements require court approval to be enforceable.

Answer 38

No
If debtor is represented by an attorney, no hearing or court approval is required if the attorney files an affidavit or declaration that the debtor has been fully advised of the legal consequences of the agreement and such is not a hardship on the debtor or the debtor’s family. If not represented by an attorney, a hearing and approval is required;

Question 39

Y/N: Reaffirmation agreements between a debtor and a creditor can be made and are enforceable even after a discharge decree has been issued.

Answer 39

No

the agreement must be entered into prior to the granting of the discharge decree in bankruptcy

Question 40

T/F: Student loan balances are generally not dischargeable in a Chapter 7 bankruptcy proceeding.

Answer 40

True

Question 41

T/F: Unpaid property taxes from the previous year are a dischargeable debt.

Answer 41

False.

They are generally not dischargeable.

Question 42

T/F: A reaffirmation agreement is signed by a debtor and an unsecured creditor, and the agreement is filed with the bankruptcy court before a discharge decree is issued. The debtor is not represented by an attorney. For this agreement to be enforceable, court approval is required.

Answer 42

True