Friday, April 13, 2012

Business Texts and Cases Chapter 30 Bankruptcy Law


Chapter 30


Bankruptcy Law



true/false questions

A1.      Bankruptcy law has one goal—to ensure equitable treatment to creditors who are competing for a debtor’s assets.

            answer:    F                              PAGE:     611                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B1.      In some circumstances, a bankruptcy court can conduct a jury trial.

            answer:    T                              PAGE:     611                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A2.      Bankruptcy proceedings are held in state small-claims courts.

            answer:    F                              PAGE:     611                          TYPE:      +
                        NAT: AACSB Analytic                     AICPA Legal

B2.      Bankruptcy law has one goal—to encourage the continued use of credit

            answer:    F                              PAGE:     611                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A3.      Only an individual can be a debtor under Chapter 7.

            answer:    F                              PAGE:     612                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B3.      Bankruptcy proceedings focus on the procedures to administer a debtor’s estate in bankruptcy.

            answer:    T                              PAGE:     611                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A4.      Concealing assets from a bankruptcy court is a crime.

            answer:    T                              PAGE:     613                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B4.      Any debtor who is liable on a claim held by a creditor may file for bankruptcy.

            answer:    t                              PAGE:     612                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A5.      A bankruptcy court looks at a debtor’s income to de­termine whether the debtor’s petition for bankruptcy consti­tutes substantial abuse.

            answer:    t                              PAGE:     613                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B5.      Before filing for bankruptcy, a consumer-debtor must receive informa­tion about credit counseling.

            answer:    t                              PAGE:     612                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A6.      The adequate protection doctrine protects unsecured creditors from the actions of assertive secured creditors in bankruptcy proceedings.

            answer:    F                              PAGE:     616                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B6.      A debtor must be insolvent to file a petition for bankruptcy.

            answer:    F                              PAGE:     612                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A7.      Almost any legal obligation of a debtor can constitute a creditor’s claim.

            answer:    T                              PAGE:     617                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B7.      If an involuntary bankruptcy proceeding is initiated in bad faith, then a court may award damages for injuries caused to the debtor’s reputation.

            answer:    t                              PAGE:     616                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A8.      The principal duty of a trustee is to liquidate and close up the debtor’s es­tate as quickly as possible.

            answer:    t                              PAGE:     618                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B8.      The adequate protection doctrine protects secured creditors from losing their security as a result of the automatic stay.

            answer:    T                              PAGE:     616                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A9.      The homestead exemption under the Bankruptcy Code is unlimited.

            answer:    F                              PAGE:     618                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B9.      In most states, state law determines the amount of a debtor’s property that is exempt from dis­tribution on bankruptcy.

            answer:    t                              PAGE:     617                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A10.    A trustee has the power to avoid a sale of the debtor’s property.

            answer:    t                              PAGE:     619                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B10.    The homestead exemption has been abolished under the Bankruptcy Code.

            answer:    F                              PAGE:     618                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A11.    On a debtor’s bankruptcy, a secured creditor cannot recover more on a debt than the value of the collateral covering the debt.

            answer:    F                              PAGE:     620                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B11.    Before a discharge is granted, a debtor can transfer property or make a payment in preference to one creditor over another.

            answer:    F                              PAGE:     619                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A12.    In general, the claims of all of the creditors of an estate must be satisfied before any re­maining amounts can be given to the debtor.

            answer:    t                              PAGE:     621                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B12.    Unsecured parties have priority over secured parties to the proceeds from the disposition of collateral on the distribution of a debtor’s estate.

            answer:    F                              PAGE:     620                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A13.    If the assets in a debtor’s estate in bankruptcy are insufficient to pay fully all creditors, none of the creditors are paid.

            answer:    f                              PAGE:     621                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B13.    It is possible, on a debtor’s bankruptcy, that an unsecured creditor might receive nothing to cover a debt.

            answer:    t                              PAGE:     621                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A14.    In a bankruptcy proceeding, if a discharge is denied to a debtor, the credi­tors are denied the distribution of the debtor’s assets.

            answer:    F                              PAGE:     623                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B14.    A discharge granted to a debtor in a bankruptcy proceeding discharges all of the debtor’s debts.

            answer:    F                              PAGE:     621                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A15.    Before obtaining a discharge in bankruptcy, a consumer-debtor must at­tend a consumer education course.

            answer:    t                              PAGE:     623                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B15.    All student loans are dischargeable in bankruptcy.

            answer:    F                              PAGE:     621                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A16.    If, within a certain time after a discharge, it is discovered that a debtor concealed property to defraud a creditor, the discharge may be revoked.

            answer:    t                              PAGE:     623                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B16.    If the assets in a debtor’s estate in bankruptcy are insufficient to pay fully all creditors, the debtor is liable for the difference.

            answer:    F                              PAGE:     621                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

A17.    A corporate debtor must be “out of business” before it can file a bank­ruptcy petition for reorganization under Chapter 11.

            answer:    F                              PAGE:     624                          TYPE:      =
                        NAT: AACSB Analytic                     AICPA Legal

B17.    In a reorganization, a debtor pays a portion of the debts, is discharged of the rest, and is allowed to continue in business.

            answer:                                     PAGE:     624                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A18.    The time for repayment under an individual’s Chapter 11 plan is three or five years, depending on the debtor’s family income.

            answer:    T                              PAGE:     628                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B18.    A Chapter 13 plan can be initiated only by the filing of an involuntary petition.

            answer:    F                              PAGE:     626                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A19.    Debts based on fraud may be discharged under Chapter 13.

            answer:    F                              PAGE:     629                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B19.    A Chapter 11 plan is binding on confirmation and the debtor is discharged.

            answer:    F                              PAGE:     626                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

A20.    The procedure and content of a Chapter 12 plan are similar to the proce­dure and content of a Chapter 13 plan.

            answer:    t                              PAGE:     629                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal

B20.    The Bankruptcy Code’s Chapter 12 is intended to aid charitable institutions.

            answer:    f                              PAGE:     629                          TYPE:      N
                        NAT: AACSB Analytic                     AICPA Legal


multiple choice questions

A1.      Carlton files a petition in bankruptcy. One of the goals of bankruptcy law with respect to a debtor is to

a.         encourage the continued use of credit to borrow funds.
b.         ensure that third parties will continue to guarantee loans.
c.         provide a fresh start, free from creditors’ claims.
d.         shield assets from creditors’ claims.

            ANSWER:    C                        PAGE:           611                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B1.      Nero files a petition in bankruptcy. The proceeding is governed by the Bankruptcy Code, which is encompassed by

a.         Article 3 of the Uniform Commercial Code.
b.         Chapter 5 of the Federal Register.
c.         Section 7 of the appropriate state statute.
d.         Title 11 of the United States Code.

            ANSWER:    D                        PAGE:           611                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A2.      Mabel files a petition in bankruptcy. The initial proceeding on this peti­tion will be in

a.         a federal bankruptcy court.
b.         a state bankruptcy court.
c.         the highest court in the state in which A is located.
d.         the United States Supreme Court.

            ANSWER:    A                        PAGE:           611                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B2.      Lulu joins with other creditors to force Mikhail, a debtor, into bankruptcy. One of the goals of bankruptcy law with respect to creditors is to

a.         ensure that creditors will continue to lend to insolvent debtors.
b.         protect creditor assets from diminution in value.
c.         provide equitable treatment in the competition for debtor assets.
d.         make all debtor property available for creditor claims.

            ANSWER:    C                        PAGE:           611                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A3.      A petition for a discharge in bankruptcy under Chapter 7 may be filed by

            a.         Employees Credit Union, a corporation.
            b.         Federal Savings & Loan Association, a corporation.
            c.         Goodhands Insurance Company, a corporation.
            d.         Huey, an independent financial adviser.

            answer:    D                              PAGE:     612                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B3.      Tina operates a sole proprietorship, a corporation, and a partnership. Tina wants to ob­tain relief for her individual debts and the debts of her corporation and partnership. Tina may file a petition for each under

            a.         Chapter 7.
            b.         Chapter 9.
            c.         Chapter 11.
            d.         Chapter 13.

            answer:    a                              PAGE:     612                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A4.      Elmo files a petition in bankruptcy. If the court concludes that there are grounds for a finding of “substantial abuse,” the court will most likely

a.         dismiss Elmo’s petition.
b.         discharge Elmo’s debts.
c.         distribute Elmo’s property to Elmo’s creditors.
d.         issue an automatic stay  against any actions by Elmo’s creditors.

            ANSWER:    A                        PAGE:           613                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B4.      Kofi files a petition for bankruptcy. Kofi must include with the petition

a.         a list of creditors and the amount of the debt owed to each only.
b.         a list of creditors and the amount of the debt owed to each, a list of property, and a statement of financial affairs.
c.         a list of property only.
d          a statement of financial affairs only.

            answer:    B                              PAGE:     613                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A5.      Mia’s voluntary petition for bankruptcy is found to be proper. The order for relief is effective as soon as

            a.         Mia files the petition.
            b.         Mia posts a bond to cover the costs of the proceedings.
            c.         Mia’s creditors agree to the terms.
            d.         the trustee collects and distributes the property of Mia’s estate.

            answer:    a                              PAGE:     615                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal


B5.      Dona goes through an involuntary bankruptcy proceeding. An invol­un­tary bankruptcy occurs when

a.         a debtor files forms designated for the purpose in a bankruptcy court.
b.         a debtor is unable to pay his or her debts as they come due.
c.         a debtor’s creditors force the debtor into bankruptcy proceedings.
d.         a debtor’s debts exceed the fair market value of his or her assets.

            answer:    C                              PAGE:     616                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A6.      Tasty Pastries declares bankruptcy, idling Tasty’s delivery vehicles. A credi­tor with a se­cured interest in the vehicles can compel Tasty to pay a cer­tain amount of money each month to offset the depreciation in the value of the vehicles. This is

            a.         the adequate protection doctrine.
            b.         the avoidance doctrine.
            c.         the creditor preference rule.
            d.         the Tasty Pastries rule.

            answer:    A                              PAGE:     616                          TYPE:      +
                        NAT: AACSB Reflective                                                   AICPA Legal


B6.      Ollie files a petition in bankruptcy. At the moment of filing

a.         an automatic stay  goes into effect.
b.         Ollie’s debts are discharged.
c.         Ollie’s petition is dismissed.
d.         Ollie’s property is distributed to Ollie’s creditors.

            ANSWER:    A                        PAGE:           616                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A7.      Valley Ranch cannot provide its creditors with adequate protection dur­ing the automatic stay. The bankruptcy court is most likely to

            a.         deny Valley Ranch a discharge.
b.         place the affected assets in the hands of a neutral third party.
            c.         remove the stay and permit the affected assets to be repossessed.
            d.         sell the affected assets.

            answer:    C                              PAGE:     616                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B7.      Mac files a petition for a discharge in bankruptcy. Mac’s failure to ap­pear at a meet­ing of the creditors listed in Mac’s schedules may result in Mac being

            a.         denied a discharge of bankruptcy.
            b.         fined.
            c.         held in contempt.
            d.         imprisoned.

            answer:    A                              PAGE:     617                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A8.      Don files a petition for bankruptcy. Don’s creditors must file with the court their proof of claims against Don’s assets within

a.         fifteen days of the creditors’ meeting.
b.         thirty days of the creditors’ meeting.
c.         sixty days of the creditors’ meeting.
d.         ninety days of the creditors’ meeting.

            answer:    D                              PAGE:     617                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B8.                  Elle is a trustee for a federal bankruptcy court. Elle’s duties include

a.         collecting a debtor’s property.
b.         establishing priority for the payment of unsecured creditors.
c.         operating a debtor’s business to obtain maximum profit for creditors.
d.         submitting to an examination under oath by the creditors.

            answer:    A                              PAGE:     618                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

Fact Pattern 30-1A (Questions A9–A10 apply)
Eve sells her motorcycle to her brother Floyd for $1,000. Twelve days later, Eve files for bankruptcy under Chapter 7.

A9.      Refer to Fact Pattern 30-1A. Floyd dies while riding the cycle. Eve is Floyd’s only heir. With respect to the bankruptcy estate, the inheritance is

a.         exempt property.
b.         part of the estate if Floyd died more than 180 days after Eve’s filing.
c.         part of the estate if Floyd died within 180 days after Eve’s filing.
d.         part of the estate if the accident was in some way Eve’s fault.

ANSWER:    C                              PAGE:     617                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B9.      Thirty-one days before filing a petition in bankruptcy, Frida transfers prop­erty and makes payments that favor one creditor over another. These are

            a.         affirmation agreements.
            b.         preferences.
            c.         secured interests.
            d.         unsecured debts.

            answer:    b                              PAGE:     619                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

Fact Pattern 30-1A (Questions A9–A10 apply)
Eve sells her motorcycle to her brother Floyd for $1,000. Twelve days later, Eve files for bankruptcy under Chapter 7.

A10.    Refer to Fact Pattern 30-1A. Regarding the sale of the cycle, the trustee may

a.         cancel it as a fraudulent transfer.
b.         cancel it as a voidable preference.
c.         not cancel it because it is a sale, not a gift.
d.         not cancel it, but can sue Floyd’s estate for the return of the $1,000.

ANSWER:    A                              PAGE:     619                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

Fact Pattern 30-1B (Questions B10-B11 apply)
In January, Jazz Dance Studio owes Kay, its musical director, $1,800 for cur­rent wages, receives $700 as a down payment for dance lessons from Lora, and pays a Music, Inc., a sheet music supplier, $1,500 of $3,000 owed. In February, the studio files for bankruptcy under Chapter 7.

B10.    Refer to Fact Pattern 30-1B. Based on the size of the studio’s estate in bank­ruptcy, each of Jazz’s creditors will get only 10 percent of their claims. Regarding the payment to Music, Inc., the trustee may

a.         not recover it because Music’s claim has priority.
b.         not recover it unless Music is an in­sider.
c.         recover it as a fraudulent transfer.
d.         recover it as a voidable preference.

ANSWER:    D                              PAGE:     619                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

Fact Pattern 30-2A (Questions A11–A12 apply)
Rely Credit Company loans Standard Manufacturing Company $50,000 and takes a se­curity interest in the equipment that Standard buys with the money and receives on July 1.  Standard files for bankruptcy on July 12.

A11.    Refer to Fact Pattern 30-2A.  If Rely does not perfect its security inter­est before Standard files for bankruptcy, then Rely will be an unse­cured creditor and the trustee of Standard’s estate can

a.         invalidate Rely’s interest only before Rely perfects it.
b.         invalidate Rely’s interest only if Rely knew of the impend­ing bankruptcy.
c.         invalidate Rely’s interest under any circumstances.
d.         not invalidate Rely’s interest.

answer:    C                              PAGE:     619                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B11.    Refer to Fact Pattern 30-1B. The highest priority belongs to

a.         Kay and Music, Inc.
b.         Kay only.
c.         Lora only.
d.         Music, Inc., only.

ANSWER:    A                              PAGE:     620                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

Fact Pattern 30-2A (Questions A11–A12 apply)
Rely Credit Company loans Standard Manufacturing Company $50,000 and takes a se­curity interest in the equipment that Standard buys with the money and receives on July 1.  Standard files for bankruptcy on July 12.

A12.    Refer to Fact Pattern 30-2A.  If Rely perfects its security interest be­fore Standard files for bankruptcy, then Rely will be a secured credi­tor and the trustee of Standard’s estate can

a.         invalidate Rely’s interest only after Reliable perfects it.
b.         invalidate Rely’s interest only if Rely knew of the impend­ing bankruptcy.
c.         invalidate Rely’s interest under any circumstances.
d.         not invalidate Rely’s interest.

            answer:    D                              PAGE:     619                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B12.    Gem Jewelers files a voluntary petition for bankruptcy. In listing its as­sets, Gem in­tentionally omits certain valuable stones. After Gem is granted a discharge, Hasty Catering, one of Gem’s unsecured creditors whose claims were discharged, learns of the fraud. Hasty can

            a.         do nothing.
            b.         enforce its claim against Gem.
            c.         file an involuntary petition for bankruptcy against Gem.
            d.         take possession of the stones with or without a breach of the peace.

            answer:    B                              PAGE:     621                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A13.    Kipper files a petition in bankruptcy. Kipper’s dischargeable debts include

a.         domestic-support obligations.
b.         student loans unless the lender would suffer undue hardship.
c.         unpaid state and federal taxes.
d.         unsecured credit-card debt.

            ANSWER:    D                        PAGE:           621                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B13.    Pola files a petition in bankruptcy. Pola’s non-dischargeable debts include

a.         domestic-support obligations.
b.         student loans if payment would impose undue hardship.
c.         unpaid loans to finance home repairs.
d.         unsecured credit-card debt.

            ANSWER:    A                        PAGE:           621                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A14.    Fix-It Auto Repair receives a discharge in bankruptcy, even though some creditors hold judgments on overdue debts against it and others filed ac­tions to collect on overdue debts before the bankruptcy. Fix-It’s dis­charge will

a.         neither stop actions nor void judgments regarding overdue debts.
b.         only stop actions to collect overdue debts.
c.         only void uncollected judgments on overdue debts.
d.         stop actions and void judgments regarding overdue debts.

            answer:    D                              PAGE:     621                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B14.    Eli agrees to pay a debt to Financial Credit, Inc., which is otherwise dis­chargeable in bankruptcy. This is

            a.         a justification.
            b.         a novation.
            c.         a reaffirmation.
            d.         a rejection.

            answer:    C                              PAGE:     623                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A15.    To reorganize debt and continue in business, Sports & Fitness Corporation may file a petition in bankruptcy under the Bankruptcy Code’s Chapter

a.         7.
b.         11.
c.         12.
d.         13.

            ANSWER:    B                        PAGE:           624                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B15.    Micro Corporation’s creditors agree to a workout with the firm. This is

            a.         a Chapter 11 bankruptcy proceeding.
            b.         an accountant’s summary of a debtor’s financial situation.
            c.         a privately negotiated adjustment of creditor-debtor relations.
            d.         a reorganization of corporate debts and debtors.

            answer:    C                              PAGE:     624                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A16.    Natural Resources, Inc. (NRI), files for bankruptcy under Chapter 11 and assumes the role of a debtor in possession. In this role, NRI is simi­lar to

            a.         a creditor at a Chapter 7 creditors’ meeting.
            b.         a family farmer after a discharge under Chapter 12.
            c.         a secured creditor in possession of collateral under Chapter 13.
            d.         a trustee in a liquidation proceeding under Chapter 7.

            answer:    D                              PAGE:     625                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B16.    Paula is a debtor. Paula’s employer Quality Communications, Inc., her ex-husband Rob, her alma mater State University, and Timely Credit Company are her creditors. For these parties, a repayment plan under Chapter 13 could be filed by

            a.         Paula only.
            b.         Paula, her employer, or her creditors only.
            c.         Paula or her creditors only.
            d.         Paula’s employer only.

            answer:    A                              PAGE:     626                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A17.    To adjust debt and institute a repayment plan, Sven—who is not a corpo­ration, a partnership, or a family farmer or fisherman—may file a peti­tion in bankruptcy under the Bankruptcy Code’s Chapter

a.         7.
b.         11.
c.         12.
d.         13.

            ANSWER:    D                        PAGE:           626                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

B17.    To adjust debt and institute a repayment plan, Q.T. CafĂ©, a small business, may file a petition in bankruptcy under the Bankruptcy Code’s Chapter

a.         7.
b.         11.
c.         12.
d.         13.

            ANSWER:    D                        PAGE:           626                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal

A18.    Veda believes that she needs to obtain a Chapter 13 discharge in bank­ruptcy. A Chapter 13 proceeding can be initiated by a filing of a pe­tition by

            a.         a creditor.
            b.         a debtor.
            c.         anyone.
            d.         a trustee.

            answer:    B                              PAGE:     626                          TYPE:      +
                        NAT: AACSB Reflective                                                   AICPA Legal

B18.    Jill believes that she should file a plan for a Chapter 13 discharge in bankruptcy. A Chapter 13 bankruptcy plan must provide for

            a.         the completion of all payments to all creditors within six years.
            b.         the payment of 100 percent of all obligations in full.
            c.         the surrender of all collateral to the creditors.
            d.         the turnover of the debtor’s future income to the trustee.

            answer:    C                              PAGE:     628                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A19.    Suki files for bankruptcy under Chapter 13. The value of her property to be distributed under the plan is more than the amount of the creditors’ claims. The court can approve the plan

            a.         only if neither an unsecured creditor nor the trustee objects.
            b.         only if no unsecured creditor objects.
            c.         only if the trustee does not object.
            d.         over the objection of either an unsecured creditor or the trustee.

            answer:    D                              PAGE:     628                          TYPE:      +
                        NAT: AACSB Reflective                                                   AICPA Legal

B19.    Owen drops out before he completes his college education and starts his own business. Five years later, Owen files for bankruptcy under Chapter 13. Owen will obtain a discharge of all debts provided for by the Chapter 13 plan if the value of the property distributed under the plan is greater than what would have been available in a liquidation and

a.         if he fails to make all payments due to events beyond his control.
b.         if he stays in business for at least five years.
            c.         if he takes out a student loan and returns to school.
            d.         under no circumstances.

            answer:    A                              PAGE:     628                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

A20.    Gustav files a petition for bankruptcy under Chapter 13. Gustav is granted a discharge. Debts that will not be discharged include claims for

a.         domestic support, fraudulently incurred debt, and student loans.
            b.         domestic support only.
            c.         fraudulently incurred debt only.
            d.         student loans only.

            answer:    A                              PAGE:     629                          TYPE:      =
                        NAT: AACSB Reflective                                                   AICPA Legal

B20.    To adjust debt and institute a repayment plan, Rolf, a family farmer, may file a petition in bankruptcy under the Bankruptcy Code’s Chapter

a.         1.
b.         3.
c.         5.
d.         12.

            ANSWER:    D                        PAGE:           629                          TYPE:      N
                        NAT: AACSB Reflective                                                   AICPA Legal



Essay Questions

A1.  Current City (CC) is a retail seller of television sets. CC sells Dhani a $5,000 large-screen, high-definition, plasma set on a retail installment security agreement in which he pays $100 down and agrees to pay the balance in equal installments. CC retains a security interest in the set, and perfects that interest by filing a financing statement centrally. Two months later, Dhani is in default on the payments to CC and is involun­tarily petitioned into bankruptcy by other creditors. Discuss CC’s right to repossess the TV set and whether CC has priority over the trustee in bankruptcy to any proceeds from the disposal of the set.

            ANSWER:    CC will not be able to repossess the set.  The filing of the in­voluntary petition in bank­ruptcy operates as an automatic stay of any creditor’s action against the debtor or the property of the debtor.  If CC knowingly violates the automatic stay, CC could be liable to any injured party for actual damages suffered, all costs, reasonable attorneys’ fees, and even possibly punitive damages.  Therefore, CC’s right of reposses­sion is cut off by the bankruptcy proceeding.  Because Dhani is a con­sumer‑debtor, within thirty days of the filing of the peti­tion or before the first creditor’s meeting (whichever is first) Dhani must file with the clerk his intent as to the disposition of the TV set—is, whether he in­tends to retain the set, surrender the set to CC, claim the set as exempt, or reaffirm the debt.  The trustee must carry out this intent within forty‑five days of this filing.  As a secured party, however, CC may at­tempt to get relief from the stay by claim­ing it needs adequate protection to preserve its security interest in the set.  If, for exam­ple, the set is still in Dhani’s possession and is being used by him, the bankruptcy court could require Dhani or the trustee to make periodic cash payments or even a single, one‑time payment to protect against depreciation of the value of the set.  If adequate pro­tection cannot be pro­vided, the court may vacate the stay and allow CC to repossess the set by pur­su­ing its rights under Article 9 of the UCC.  CC does have a right of priority over the trustee.  A trustee occupies the same position as a lien creditor, but a lien credi­tor’s priority is secondary to a previously perfected secured party.  CC is a perfected se­cured party, and on sale of the television set it is entitled to the proceeds up to the amount of balance of the debt and any costs incurred because of Dhani’s default.

            PAGES:         616, 618 & 620      type:      N
                        NAT: AACSB Reflective                                                   AICPA Decision Modeling

B1.  Real Estate Sales Corporation (RESC) orders office equipment from Standard Goods, Inc., which has an unperfected security interest in the equipment until it is paid for. Meanwhile, RESC takes out a loan from Trend Credit, Inc., subject to a security interest in RESC’s building and equip­ment, which Trend perfects. RESC files a bankruptcy petition under Chapter 7. If the petition is granted, in what or­der will RESC’s creditors be paid?

            ANSWER:    The order of the priority of the creditors in this problem is (1) Trend, which has a perfected security interest in RESC’s building and equipment, and (2) Standard, which has only an unper­fected security in­terest in RESC’s office equipment. This is because, un­der the priority es­tablished by the Bankruptcy Code, and between the creditors listed in this question, those with perfected security interests have the highest priority. In almost cases, including this one, the claims of unsecured credi­tors are paid last, if at all.

            PAGES:         620–621                      type:  =
                        NAT: AACSB Reflective                                                   AICPA Decision Modeling

A2.  Job Service, Inc., needs funds to meet its payroll, to make other cur­rent operating expenses, and to pay its creditors. Kelly, Job Service’s only shareholder, loans the company $10,000 and accepts a promissory note signed on behalf of Job Service by Luna, the firm’s accountant. Job Service’s fi­nancial problems continue, however, and the firm’s creditors file an in­voluntary petition to force it into bankruptcy. Is Kelly entitled to repay­ment of the loan to Job Service? If so, what is the priority of the claim?

            ANSWER:    Kelly is entitled to be repaid the amount loaned to Job Service. The priority is that of any other general creditor, however, which is at the bottom of the list of the classes of unsecured creditors. Because Luna signed the promissory note, Kelly can prove the claim. The claim is not superior or inferior to other claims because Kelly is the debtor’s only shareholder, nor is it worthless for that same reason. Kelly is a not a se­cured creditor because she did not ask for, and did not get, collateral to se­cure the loan. Thus, she is a general unsecured creditor who can share, on a proportionate basis, whatever proceeds are available to other mem­bers of the class of general unsecured creditors after those with higher prior­ity are paid in full.

            PAGES:         620–621                 type:      =
                        NAT: AACSB Reflective                                                   AICPA Decision Modeling

B2.  First State Bank is a secured party on a $5,000 loan to Geoff, who owns Happy Hours, a nightclub. When Geoff experiences financial difficulty, creditors other than First State Bank petition him into involuntary bankruptcy. The value of the secured collateral has substantially decreased in value. On its sale, the debt to First State Bank is reduced to $2,500. Geoff’s estate consists of $100,000 in exempt assets and $2,000 in nonexempt assets. After the bankruptcy costs and back wages to Geoff’s employees are paid, nothing is left for unsecured creditors. Geoff receives a discharge in bankruptcy. Later he decides to go back into business. By selling a few exempt assets and getting a small loan, he is able to buy the Idle Inn, a small, but profitable, restaurant. Geoff goes to First State Bank for the loan. The bank claims that the balance of its secured debt was not discharged in Geoff’s bankruptcy. He signs an agreement to pay First State Bank the $2,500, and the bank makes a new unsecured loan to him. Is First State Bank correct that the balance of its secured debt was not discharged in bankruptcy? What is the legal effect of Geoff’s agreement to pay the bank $2,500 after the discharge in bankruptcy?

            ANSWER:    A secured creditor is entitled to priority to the proceeds from the dis­posal of the secured collateral of the bankrupt debtor up to the amount of the debt owed.  Should the proceeds not cover the secured debt, the secured party be­comes an unsecured creditor for the balance.  Unless the debtor is denied a dis­charge in bankruptcy, all debts of the debtor are rendered void upon the grant­ing of the discharge.  In this case, First State Bank is incor­rect. First State Bank became an unsecured creditor to the balance of $2,500 owed.  Geoff’s discharge in bankruptcy discharged his obligation to pay the debt.
                        The Bankruptcy Code restricts the legality of reaffirma­tions—agreements to pay debts discharged in bankruptcy.  For these agree­ments to be binding, they must be executed before the discharge in bankruptcy is granted.  All reaf­firmation agreements must be filed with the court.  Unless the debtor (Geoff) is repre­sented by an attorney, court approval is required.  The court will only approve the reaf­firmation if the agreement will not cause her a hardship and is in the best interests of Geoff.  If Geoff is represented by an attor­ney, the attorney must file a declaration or affidavit stat­ing that Geoff was fully informed of the consequences, the agreement was voluntarily made, and the agreement does not impose a hardship on Geoff or her de­pendents. Geoff has a right to rescind this agreement.  Because the reaffirma­tion agreement in this case was made after Geoff’s discharge in bankruptcy, she is not le­gally obligated to pay the $2,500 debt previously discharged in bankruptcy.

            PAGES:         620–621 & 623–624           type:            N
                        NAT: AACSB Reflective                                                   AICPA Decision Modeling


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