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
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. Café, 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
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
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
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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