Topics You Should Know (Modules 1-6) Flashcards
A “substantial understatement” for a C corporation’s tax return exceeds:
The LESSER OF 10% of the tax (or, if greater, $10,000), or $10 million.
A “substantial understatement” on an individual return exceeds:
The GREATER OF 10% of the tax, or $5,000.
The IRC imposes (in Section 6662) a 20% penalty on various types of underpayments, including:
- Underpayments attributable to negligence or disregard of rules or regulations.
- Any substantial understatement of income tax.
Under the agent’s duty to account, which of the following acts must a gratuitous agent perform and not perform?
- has a duty NOT TO COMMINGLE their funds with the principal’s funds
- must account to the principal for profits and everything that RIGHTFULLY BELONGS to the principal including the principal’s property
Name and define the duty that is owed by a principal to an agent.
- Indemnification
- The principal is obligated to indemnify the agent for any contracts entered into on the PRINCIPAL’S BEHALF with express, implied, or apparent authority or an agreement ratified by the principal.
Statute of Frauds
requires contracts to be in WRITING for the following:
- sale of goods of $500 or more
- real estate/land
- contracts impossible to perform in one year
- a promise to answer the debt of another
- an executor’s promise to be personally liable for the debt of an estate.
Name three situations where an agent has liability to third parties for their actions taken for and on behalf of the principal.
- If he commits a TORT while engaged in the principal’s business
- If he acts for a principal which he knows is NONEXISTENT and the third party is unaware of this
- If he acts for an UNDISCLOSED principal as long as the principal is subsequently disclosed
Name two situations where an agent will NOT be personally liable to third parties for their actions taken for and on behalf of the principal.
- If he makes a contract which he had no authority to make but which the principal RATIFIES.
- If he makes a contract which he had either express, implied, or APPARENT authority.
Partially disclosed principal
a principal whose agent reveals that he has a principal, but does not reveal the principal’s identity
Name a situation where a third party is permitted to have a cause of action against both the agent and principal.
when the principal is a partially disclosed principal
To which party, if any, may the CPA disclose the client’s tax return information without the client’s consent?
CPA’s attorney
Classification of a principal as disclosed, undisclosed, or partially disclosed affects the __________.
contractual liability of the agent toward third parties
Classification of a principal as disclosed, undisclosed, or partially disclosed doesn’t affect the __________.
the authority given the agent
Accountant-client testimonial privilege
- Classic privileged communications include attorney-client, doctor-patient, and priest-penitent.
- Where applicable, the protected party (client, patient, penitent) can PREVENT the party who received the protected communications (attorney, doctor, priest) FROM TESTIFYING.
- Only recognized by approximately 15 STATES and congress for very limited purposes
List the three primary approaches to accountant liability.
- The Privity Approach of Ultramares v. Touche
- The Restatement “Limited Class” Approach
- The Reasonable Foreseeability Approach
Describe the Privity Approach of Ultra mares v. Touche to accountant liability.
The Accountant is liable only to those with whom s/he is in PRIVITY OF CONTRACT
Describe the Reasonable Foreseeability Approach to accountant liability.
The Accountant is liable to whomever s/he can REASONABLY FORSEE may use the financial statements s/he certifies or prepares.
Describe the Restatement “Limited Class” approach to accountant liability.
- Majority view
- The accountant has third-party liability to a limited class of KNOWN or INTENDED USERS of financial statements whose specific identity need not be known by the CPA.
Define “negligence”.
- The performance of a contract in a careless manner
2. Negligence does not lead to punitive damages
Which agency is responsible for determining the continuing professional education (CPE) requirements for licensed CPAs?
The board of accountancy for the state in which the licensed CPA practices
What is reasonable basis?
Standard for DISCLOSED positions (≥ 20% chance of approval or being sustained)
What is substantial authority?
Standard for UNDISCLOSED positions (≥ 40% chance of approval or being sustained)
List the scenarios in which no underpayment penalty is charged for underpayment of taxes owed for individuals.
- No penalty is imposed if the tax due with the return less the amount paid through withholding (including excess social security tax withholding) is LESS THAN $1,000.
- No penalty is imposed if the tax payments during the year were AT LEAST 90% of current-year taxes or 100% of last year’s taxes. (If the taxpayer’s AGI exceeds $150,000, then tax payments during the year must be at least 110% of last year’s taxes.)
List the scenarios in which no underpayment penalty is charged for underpayment of taxes owed for corporations.
Payments are at least equal to the LOWER OF:
- 100% of current year’s tax
- 100% of the tax that would be due by placing the current year’s income for specified monthly periods on an annualized basis
- 100% of the preceding year’s tax
Is a principal responsible for the payment of an agent’s personal checks?
No, the agent is liable
When are agents personally liable for contracts they sign?
if their principal is partially disclosed or undisclosed
When are undisclosed principals liable for contracts their agent’s sign?
they authorized the agent’s actions
Treasury Department Circular 230
provides regulations regarding the practice of an accountant before the IRS
The Internal Revenue Code
provides regulations regarding the reporting and payment of taxes
What professional body has the authority to grant and revoke a CPA’s license to practice public accounting?
State board of accountancy
What kind of misrepresentation made by an agent is a principal liable for?
A principal is liable for ALL AUTHORIZED misrepresentations, but not for all UNAUTHORIZED misrepresentations.
In what situation is a principal liable for an unauthorized misrepresentation made by an agent?
- the principal is liable only if an EMPLOYEE makes the misrepresentation
- an employee is a worker who tends to be paid wages or salary, has a long-term relationship with the principal, and is supervised by the principal
In a common law negligence suit, the plaintiff attempts to show that the CPA __________.
did NOT use the care of a REASONABLE accountant in the circumstances
Name three laws that an accountant who prepares tax returns should be familiar with respect to the privacy of client information.
- Accountants are prohibited from disclosing to a nonaffiliated third party any NONPUBLIC PERSONAL INFORMATION about their clients
- Accountants are required to develop, implement, and maintain a comprehensive INFORMATION SECURITY PROGRAM that outlines the ways in which they protect client information
- Accountants are responsible for maintaining the confidentiality of information that is OUTSOURCED for processing
A CPA performs an audit and fails to detect a material misstatement. The mistake did not rise to the level of negligence. Will the CPA be liable?
No, a CPA will NOT be held liable if negligence cannot be proved. The CPA excised due care.
What acts by the operation of law can lead to the termination of an agency relationship?
- Death or insanity/incompetency of the principal or agent
- Bankruptcy (of the agent if it impairs his/her duties; of the principal if the agent no longer desires the relationship)
- Change of law
- Loss or destruction of subject matter
Define “actual fraud.”
an intentional tort that is made with scienter or a KNOWLEDGE to deceive.
Application of Common Law vs. UCC
- UCC Article 2 applies to contracts that involve the SALE OF GOODS
- Common law applies to SERVICE and REAL ESTATE contracts
- Where there are mixed contracts (sale of both goods and services), we look to the PRICE and the INTENT of the parties
- Under common law, MODIFICATION of an existing contract must be supported by CONSIDERATION
- Under the UCC, however, a contract may be MODIFIED either orally or in writing WITHOUT CONSIDERATION
Four requirements for the formation of a contract
- offer
- acceptance
- consideration
- capacity
Bilateral Contract
A PROMISE is made by one party to the contract in exchange for a PROMISE from the other party to the contract.
(e.g. Mary made the offer (promise) to buy Hal’s desktop computer, and Hal accepted her offer by the promise to sell.)
Unilateral Contract
A type of contract in which one side makes a PROMISE in exchange for an ACTION or performance from the other side.
(e.g. Kay, an art collector, promised Hammer, an art student, that if Hammer could obtain certain rare artifacts within two weeks, Kay would pay for Hammer’s postgraduate education.)
Executory Contract
A contract that has NOT YET been fully performed by the involved parties (lease agreement…building and payments provided over the term of the lease)
Executed Contract
A contract that HAS been fully performed by both parties to that contract
Quasi-Contract or Implied-in-Law Contract
A contract imposed by the courts or by law when some performance has gone forward, even though there is NO express or implied contract. The law creates a quasi-contract for the parties to prevent unjust enrichment of one party by the other.
Implied or Implied-in-Fact Contract
A contract formed, at least in part, based on the conduct of the parties or based on the factual circumstances.
Express Contract
A contract formed wholly by oral and/or written words.
revocation of an acceptance
does NOT require consideration
e.g. the knowledge of a sale of real estate was going to purchase
counteroffer
- rejects the original offer
2. follows the “mirror image” rule
Opal offered, in writing, to sell Larkin a parcel of land for $300,000. If Opal dies, the offer will:
Automatically terminate prior to Larkin’s acceptance.
Advertisements are considered _________.
“invitations to trade”
they invite a party (buyer) to make an offer; it is not itself an offer
T/F Although most acceptances of bilateral offers are sent by an authorized medium and effective when sent by the authorized medium, the offeror can condition acceptance to not be effective until received. Therefore, regardless of the medium used, the acceptance must be received before the offer terminates by lapse of time.
True
A firm offer
made by a merchant in writing concerning an offer to sell goods
The Uniform Commercial Code (UCC)
contains rules applying to many types of commercial contracts, including contracts related to the sale of goods, leasing of goods, use of negotiable instruments, banking transactions, letters of credit, documents of title for goods, investment securities, and secured transactions
Accord and Satisfaction
An accord is an agreement to WAIVE LEGAL RIGHTS, releasing another party from legal obligations. Satisfaction is the actual PAYMENT of the amounts agreed to in the accord. Essentially, both parties to the contract have agreed to satisfy the contract in a DIFFERENT MANNER.
________ cannot count as consideration for current promises.
Past actions
Name and define the four situations where parol evidence can be admitted to ensure the contract is fully integrated:
- Ambiguous terms—If the record of a contract has ambiguities, it is not fully integrated, and parol evidence can be introduced only to clean up the AMBIGUITY.
- Obvious clerical or typographical error—In reducing oral contract into a record, parol evidence can be used for obvious typos and clerical ERRORS because, again, it is not fully integrated.
- Incomplete contracts—Parol evidence can be admitted to “FILL IN” THE GAPS because an incomplete contract is not a fully integrated contract.
- Contract defenses—The parol evidence rule does not prohibit the introduction of evidence that shows a defense to formation, such as FRAUD or DURESS.
Parol evidence rule
Under the parol evidence rule, a fully integrated contract (one that is complete, unambiguous, and without defenses in formation) cannot be contradicted, varied, or altered by evidence of the parties’ PRIOR negotiations, PRIOR agreements, or CONTEMPORANEOUS oral agreements.
Exception to the Statute of Frauds
If a contract has been finished, or fully performed, a party may then sue to enforce payment, even if the contract is not in writing.
Minor’s Right to Disaffirm
A minor who enters into a contract has the right to DISAFFIRM the contract and AVOID LIABILITY at any time before reaching majority and for a reasonable time thereafter. The contract is VOIDABLE at the minor’s option. When a contract is voidable, it can be set aside by one of the parties by choice. If the minor wants to honor the contract, the minor can do so—the contract is not void because a minor is involved. The contract may or may not be performed—at the minor’s option.
Inability to Return Consideration
The minor DOES NOT LOSE THE RIGHT TO DISAFFIRM DESPITE AN INABILITY TO RETURN THE CONSIDERATION. If the minor does not possess or control the consideration, the minor still has the right to disaffirm the contract. The minor need only return what he or she still has left of the consideration. If all a minor has left of a car that he or she purchased is a hubcap, the minor can return the hubcap and be entitled to recoup any money paid to the seller. The minor is ENTITLED BACK ANY CONSIDERATION that he or she has paid and cannot be held further on the contract.
Once a person has been adjudicated incompetent by a court with proper jurisdiction all FUTURE contracts with that person are:
void
T/F An adult is not bound to a valid contract and does not need to perform since the minor had the right to disaffirm the contract.
False
An adult IS BOUND to a valid contract and MUST PERFORM even though a minor had the right to disaffirm the contract.
What types of conduct render a contract VOID?
- Duress (threats) through PHYSICAL compulsion
- Contracting with a person under GUARDIANSHIP
- Fraud in the EXECUTION
What types of conduct render a contract VOIDABLE?
- Duress through IMPROPER threats
- UNDUE INFLUENCE by a dominant party in a confidential relationship
- Fraud in the INDUCEMENT (introductory statements)
Guardianship
a person who lacks mental capacity to manage their affairs and has been assigned a guardian
Name an exception to the rule that states “a unilateral mistake within a contract cannot be rescinded.”
To have the right to rescind, the other side must have actually KNOWN of the error, or the error must be so large that the other side should REASONABLY HAVE KNOWN of the error.
Statute of limitations
A statute of limitations SETS A TIME LIMIT past which a LAWSUIT cannot be brought. Unless a problem is undiscoverable, the time limit STARTS to expire AT the time of the fraudulent transfer or BREACH. A statute of limitations is usually FOUR YEARS OR LESS.
Do both parties have to sign a contract to have a valid writing under the Statute of Frauds?
No, only ONE party needs to sign
conditions precedent
something that must be present or occur BEFORE a party has a duty to perform
e.g. rezoning clause
conditions subsequent
something that must be present or occur AFTER a duty to perform has arisen
concurrent conditions
Each party’s duty to perform under a contract is DEPENDENT upon the other party’s absolute duty to perform at the same time
Name two situations that DISCHARGE a party to a contract.
- prevention of performance
2. accord and satisfaction
F.O.B. place of shipment contract
the risk passes from seller to buyer when the goods are placed in the POSSESSION OF THE CARRIER (mail guy).
Before TITLE would pass to the buyer, the seller must:
IDENTIFY GOODS by segregating them from general inventory and associating them with a specific contract
F.O.B. purchaser’s loading dock or destination
“Risk of loss” (in absence of express contract) passes from the seller to the buyer upon TENDER OR DELIVERY of the goods at the purchaser’s loading dock.
contract with a nonmerchant for delivery of goods not represented by a document of title
risk of loss passes to the buyer upon the seller’s “tender” of delivery.
Delivery is tendered when the goods are made available for a REASONABLE TIME FOR PICK-UP by the buyer.
liquidated damages clause
Parties agree in advance what DAMAGES will be if there is a breach. To be enforceable, the AMOUNT must bear a REASONABLE relationship to the harm done and NOT BE A PENALTY.
Specific performance
Requiring the other party to perform the contract; available when there are RARE goods (antiques, patents) or for buyers of LAND (land is unique).
Punitive damages
Damages awarded to PUNISH A WRONGDOER. Punitive damages are rarely given in breach of contract cases, with the example often used on the exam being in the case of FRAUD in the inducement in formation of the contract.
Compensatory damages
the amount of money that will put the nonbreaching party in the POSITION he or she would have occupied HAD NO BREACH OCCURRED
Right of replevin
has to do with RECOVERING IDENTIFIED PROPERTY that is being improperly held by the seller when the buyer cannot cover
anticipatory breach
BUYER notifies the seller that it INTENDS TO BREACH the contract
Under the Sales Article of the UCC, what rights are available to a seller when a buyer MATERIALLY BREACHES a sales contract?
- right to CANCEL the contract (may suspend the buyer’s performance and may prevent the carrier from making the delivery of the goods)
- right to RECOVER DAMAGES (e.g. resell goods that were identified to the contract and recover the difference between the contract price and resell price)
When an agent acts for an UNDISCLOSED principal, the principal will NOT be liable to third parties if the
Agent acts outside the grant of ACTUAL (express or implied) authority
What types of authority are appointed to an agent who acts for an UNDISCLOSED principal?
express and implied (both=actual) authority
apparent authority is IMPOSSIBLE because the third party will not be able to view a principal’s actions to reasonably believe that an agent has authority to do something
express or implied authority are both types of ________.
“actual authority”
Is a GIFT considered consideration within a contract?
No
the existence of consideration requires that there be _____________.
MUTUALITY of consideration (i.e., that each party is bound to give consideration in exchange for the consideration being given by the other party to the contract)
Undue influence
occurs when one party entering into a contract is so GREATLY INFLUENCED by his/her RELATIONSHIP with the second party of the contract that the first party DOES NOT EXERCISE FREE WILL in entering into the contract
novation
a three‐party agreement between the contracting parties and a third party, whereby one of the contracting parties is DISCHARGED from his/her duty and the THIRD PARTY IS SUBSTITUTED in the discharged party’s place.
Mutual rescission
both parties have MUTUALLY AGREED TO RESCIND or not go through with the contract
valid assignment of rights
does NOT MATERIALLY INCREASE the other party’s RISK OR DUTY
intended creditor beneficiary
when a party to the contract at issue owes the creditor money and the contract at issue was MADE TO SATISFY THAT DEBT; can ENFORCE the contract.
As a fiduciary to the principal, an agent must act in the best interest of the principal. Therefore, the agent has an OBLIGATION to:
refrain from COMPETING with or acting ADVERSELY to the principal, unless the principal knows and approves of such activity
good-faith purchaser
a person entrusts possession of goods to a MERCHANT who normally deals in that type of goods and obtains TITLE to those goods even though the goods were stolen
Forming an agency relationship requires that
Both the principal and agent CONSENT to the agency
Under the Sales Article of the UCC, if there is NO liquidated damage clause within a contract, however the buyer defaults, then the seller can retain a DEPOSIT of up to _____.
$500 or 20% of the purchase price, whichever is LESS
incidental beneficiary power
none, they CAN NOT ENFORCE the contract…only intended beneficiaries can.
contract rights are
generally assignable
What contract rights are and are not assignable?
- Option contract rights ARE assignable
2. Malpractice insurance policy rights are NOT assignable
assignment
DOES NOT WAIVE OR ELIMINATE the contract rights of the original party to the contract. UNLESS RELEASED, the assignor remains liable to the other contracting party. If the assignee fails to perform the obligations under the contract, the assignor is still responsible.
Contracts to purchase what CANNOT BE ASSIGNED WITHOUT CONSENT of the other party to the contract?
personal services
Rights of co-sureties when one surety is in bankruptcy. Suppose that a debtor owes the creditor $60,000. The debtor has three sureties, as follows:
Surety 1 $30,000
Surety 2 $45,000
Surety 3 $15,000
Surety 3 has declared bankruptcy. The debtor has defaulted and still owes $45,000. How much does Surety 1 and 2 owe?
To determine how much Surety 1 and Surety 2 owe, you simply TAKE SURETY 3’s pledged amount OUT OF THE DENOMINATOR and continue to use the surety’s share as the numerator.
Our original denominator was $90,000. With Surety 3 out in bankruptcy, the denominator is now $75,000, and Surety 1 owes 30000/75000 and Surety 2 owes 45000/75000.
Surety 1 = 2/5 × 45,000 or $18,000
Surety 2 = 3/5 × 45,000 or $27,000
Since the creditor RELEASED one of the two sureties, the remaining surety is liable for only ______ of the entire debt. The principal debtor is liable for _____ of the entire debt.
its right of contribution
100%
Nash, Owen, and Polk are co-sureties with maximum liabilities of $40,000, $60,000, and $80,000, respectively. The amount of the loan on which they have agreed to act as co-sureties is $180,000. The debtor defaulted at a time when the loan balance was $180,000. Nash paid the lender $36,000 in full settlement of all claims against Nash, Owen, and Polk.
The total amount that Nash MAY RECOVER from Owen and Polk is:
$28,000
When there are co-sureties, each has a right to a proportionate contribution from the others if a co-surety pays an unfair share of the debt. In this case, Nash’s liability is 2/9 of the total liability among all co-sureties ($40,000 out of a total $180,000). She therefore should not pay more than 2/9 of any total settlement. She has a right to recover 7/9 × $36,000 from the others, or $28,000. More specifically, she will get $12,000 from Owen and $16,000 from Polk.
Exception to the Statute of Frauds for a GUARANTY made by an express contract with a creditor is:
the “main purpose” or “leading object” doctrine where the guarantor will BENEFIT financially or economically
Cosigner liability
- PRIMARILY LIABLE on the debt
2. a creditor may demand payment from the cosigner alone as soon as the loan becomes due
Creditor’s obligation to a surety
- required to DISCLOSE any known MATERIAL FACTS to a surety before the surety signs a loan agreement, if such facts will substantially INCREASE the surety’s RISKS.
- When a creditor does NOT MAKE such disclosures, the creditor has committed PRESUMED FRAUD, and the surety may use this as a DEFENSE to repayment.
right of reimbursement to a surety by the debtor
sureties have a right to be “PAID BACK” by a debtor when payment is made on the debtor’s behalf
Contribution
a right one CO-SURETY has against another
What act will always result in the TOTAL RELEASE of a compensated surety?
The principal debtor’s PERFORMANCE IS TENDERED (no longer a debt to be repaid by anyone)
Under the Secured Transactions Article of the UCC, what requirements are necessary to have a SECURITY INTEREST ATTACH?
To create a security interest the creditor must give VALUE, the debtor must have RIGHTS in the collateral, and the creditor must take POSSESSION of the collateral OR obtain the agreement in a signed or authenticated WRITING by the debtor.
Perfection
A means by which a SECURED PARTY GAINS PRIORITY TO A DEBTOR’S COLLATERAL over other third parties who also claim to have an interest in the same collateral.
A purchase money security interest (PMSI)—UCC 9-309(1)
created when the interest is taken or retained by the seller of the collateral to secure the price—UCC 9-103(a)(2). In other words, the creditor is ADVANCING the FUNDS FOR the PURCHASE OF the COLLATERAL.
5 methods to obtain AUTOMATIC PERFECTION of a security interest
- Filing a finance statement - lasts for five years and can be continued with a continuation statement if filed within six months of expiration
- Physical possession of the goods
- PMSI in CONSUMER GOODS (e.g. computer)
- A sale of payment intangibles
- A sale of promissory notes
Under the Secured Transactions Article of the UCC, what are 3 components needed to FILE A FINANCE STATEMENT?
- The name of the debtor
- The address of the debtor
- A description of the collateral
Consumer goods—UCC 9-102(a)(23)
goods used or bought PRIMARILY for personal, family, or household purposes (e.g. computer)
What is the general rule for PRIORITY over other security interests?
Usually, the FIRST security interest to be PERFECTED has top PRIORITY.
Name an EXCEPTION to the PRIORITY over other security interests rule.
A PMSI IN NON-INVENTORY COLLATERAL has PRIORITY if it is PERFECTED BEFORE the debtor takes POSSESSION or WITHIN 20 DAYS thereafter.
A buyer in the ORDINARY COURSE OF BUSINESS takes goods ___________.
FREE FROM a security interest
e.g. of ordinary course of business - a buyer purchases a computer from a seller who normally sells computers
Under the UCC Secured Transactions Article, what TWO after-acquired properties (possesses in the future) may be ATTACHED to a security agreement given to a secured lender?
- inventory
2. equipment
A debtor purchased an LCD television from BestBuy for $1,000. BestBuy financed the transaction. With finance charges, the total cost of the financing is $1,200. After the debtor has paid $600, he DEFAULTS on the payment and BestBuy repossesses the TV. BestBuy has decided to keep the TV as a floor display model. The debtor believes it would be best if BestBuy sold the TV.
The debtor has paid 60% of the PURCHASE PRICE, so BestBuy MUST SELL the TV.
- compulsory disposition of the collateral
Under the UCC Secured Transactions Article, if a debtor is in DEFAULT under a payment obligation secured by goods, the secured party has the right to PERFORM THREE THINGS:
- Peacefully REPOSSESS the goods without judicial process
- Reduce the claim to a JUDGMENT (levy/tax on the nonexempt property, property other than the collateral, of the debtor)
- SELL the goods and apply the proceeds toward the debt (surplus must return to debtor; must NOTIFY the DEBTOR for plans to sell)
Requirements for creditors’ INVOLUNTARY petitions of a debtor into BANKRUPTCY
- If the debtor has TWELVE OR MORE UNSECURED CREDITORS with noncontingent claims, the PETITION MUST BE SIGNED BY THREE OR MORE of these creditors whose aggregate CLAIMS ARE $15,775 or more
- If the debtor has LESS THAN TWELVE UNSECURED CREDITORS with noncontingent claims, the PETITION REQUIRES ONLY ONE (more can sign) of these creditors with an aggregate DEBT OF $15,775 or more TO SIGN the involuntary petition.
Assignment for the benefit of creditors
- This usually involves an INSOLVENT DEBTOR who VOLUNTARILY TRANSFERS certain assets TO A TRUSTEE or assignee. The trustee or assignee LIQUIDATES the assets and tenders a PAYMENT on a PRO RATA BASIS in satisfaction of that debt TO EACH CREDITOR.
- ACCEPTANCE by the creditor is a complete DISCHARGE OF THE DEBT.
- REJECTION eliminates a creditor’s right to the property assigned, but creditor can then pursue OTHER REMEDIES including involuntary bankruptcy PETITION against debtor.
Composition of creditor’s agreements
- A contract between the debtor and his or her creditors whereby the CREDITORS AGREE TO DISCHARGE the debtor’s debts UPON A PAYMENT (usually a lesser sum).
- Creditors who DO NOT CONTRACT are NOT BOUND by the composition agreement.
- The ADVANTAGE, however, of composition agreements is an IMMEDIATE PAYMENT and it avoids costs and delay of bankruptcy proceedings; plus, many times the payments made EXCEED THOSE a creditor would receive THROUGH BANKRUPTCY.
What is EXEMPT from garnishment (deduct wages to pay debt)?
social security benefits
What is the standard for INVOLUNTARY BANKRUPTCY?
the INABILITY TO PAY DEBTS as they become due
NOT proving that liabilities are greater than assets
What are 7 EXCEPTIONS to Chapter 7 eligibility?
- Banks
- Savings (buildings) and loan associations
- Credit unions
- Railroads
- Insurance companies
- Governmental units (usually);
- Small business investment companies licensed by the Small Business Administration
Chapter 7
Referred to as “straight BANKRUPTCY” or liquidation
Chapter 11
Allows for the REORGANIZATION of a debtor to pay debts—a rehabilitation of a debtor.
Order of receivership
Courts will sometimes order that property be placed in receivership. Such an action PLACES PROPERTY in the hands of a RECEIVER, who ensures that the property is NOT WASTED BEFORE A JUDGMENT CAN BE REACHED in a lawsuit concerning a property
mechanic’s lien
- based on amounts UNPAID for work done on REAL (land or building) PROPERTY
- the property MAY BE SOLD to satisfy the debt
Writ of garnishment
The legal process of having sums DEDUCTED directly FROM a debtor’s PAYCHECK TO SATISFY A DEBT. State laws generally LIMIT THE AMOUNT that can be deducted TO AROUND 25% of a debtor’s after-tax wages.
artisan’s lien
- based on amounts UNPAID for work done on PERSONAL (movable, not land or building) PROPERTY
- the property MAY BE SOLD to satisfy the debt
A debtor’s ESTATE IN BANKRUPTCY consists of
all tangible and intangible PROPERTY of the debtor HELD AT THE COMMENCEMENT of the bankruptcy proceedings and any AFTER-ACQUIRED INCOME FROM SUCH PROPERTY RECEIVED WITHIN 180 DAYS of filing
e.g. municipal-bond interest and gifts or inheritance
When a debtor declares BANKRUPTCY, four types of NON-PREFERENTIAL PAYMENTS are PERMITTED:
- A CONTEMPORANEOUS EXCHANGE between the debtor and a creditor FOR NEW VALUE (e.g. cash payment for boat)
- The PAYMENT OF A DEBT incurred in the ORDINARY COURSE OF BUSINESS or financial affairs of the debtor
- A CONSUMER debtor’s PAYMENT of UP TO $6,425
- Payments for PATERNITY, ALIMONY, MAINTENANCE, and CHILD SUPPORT.
Who is APPOINTED to a debtor who filed for Chapter 7 eligibility?
trustee (a government-appointed official)
When a debtor declares bankruptcy, two types of PREFERENTIAL PAYMENTS are PROHIBITED:
- If a creditor is an INSIDER (someone who has a close relationship with the debtor; e.g. business associates), the creditor cannot receive a preferential PAYMENT WITHIN ONE YEAR of the filing of the bankruptcy petition from an insolvent debtor.
- An ANTECEDENT DEBT is one that was INCURRED BEFORE the bankruptcy petition was filed. These are the very debts that cannot receive preferential PAYMENTS WITHIN 90 DAYS of the filing of the bankruptcy petition from the debtor.
Name three RIGHTS A TRUSTEE HAS
- has the POWER TO require any persons holding the debtor’s property at the time the petition is filed to DELIVER CONTROL of the PROPERTY to the trustee
- has PRIORITY OVER an UNPERFECTED SECURED PARTY as to the debtor’s property
- has the avoidance POWER TO SET ASIDE a sale or transfer of the debtor’s property TO A THIRD PERSON, taking back the property as part of the debtor’s estate
What POWER does a TRUSTEE NOT HAVE?
cannot avoid all statutory or common law LIENS (such as certain warehouse liens).
Lien
a RIGHT TO KEEP POSSESSION of property belonging to another person UNTIL a DEBT owed by that person is DISCHARGED