Bankruptcy Flashcards
A voluntary petition filed under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code
- Is not available to a corporation unless it has previously filed a petition under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code.
- Automatically stays collection actions against the debtor except by secured creditors.
- Will be dismissed unless the debtor has 12 or more unsecured creditors whose claims total at least $5,000.
- Does not require the debtor to show that the debtor’s liabilities exceed the fair market value of assets.
Does not require the debtor to show that the debtor’s liabilities exceed the fair market value of assets. This is balance sheet insolvency, and the debtor does not have to make such a showing. So long as the debtor is not abusing the bankruptcy relief laws, the debtor may file for Chapter 7 protection.
Unger owes a total of $50,000 to eight unsecured creditors and one fully secured creditor. Quincy is one of the unsecured creditors and is owed $6,000. Quincy has filed an involuntary bankruptcy petition against Unger under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Unger has been unable to pay debts as they become due. Unger’s liabilities exceed Unger’s assets. Unger has filed papers opposing the bankruptcy petition.
Which of the following statements regarding Quincy’s petition is correct?
- It will be dismissed because the secured creditor failed to join in the filing of the petition.
- It will be dismissed because three unsecured creditors must join in the filing of the petition.
- It will be granted because Unger’s liabilities exceed Unger’s assets.
- It will be dismissed because Unger’s debt to Quincy alone is less than the required limit to bring an involuntary petition.
It will be dismissed because Unger’s debt to Quincy alone is less than the required limit to bring an involuntary petition. An involuntary petition may succeed if the aggregate unsecured claims of the petitioners equals or exceeds $14,725. Quincy’s claim of $6000 alone does meet that limit.
Which of the following statements is (are) correct regarding debtors’ rights?
- I. State exemption statutes prevent all of a debtor’s personal property from being sold to pay a federal tax lien.
- II. Federal Social Security benefits received by a debtor are exempt from garnishment by creditors.
II Only. Exemption statutes never apply to all personal property. They may exempt selected items, such as a computer, clothes, bibles, trade equipment, and furniture. A creditor cannot seize any and every asset to satisfy a debt. Social Security benefits are exempt from garnishment.
Which of the following pre-judgment remedies would be available to a creditor when a debtor owns no real property?
- Writ of attachment
- Garnishment
Both…
Garnishment is the legal process of having sums deducted directly from a debtor’s paycheck to satisfy a debt. Clearly, no real property is necessary for garnishment. Under a writ of attachment, a debtor’s property is seized so that, if a creditor wins a judgment, something will be available to pay the judgment. There is no need for the property to be real property, such as land or a house; it is usually personal property, such as cars or boats.
Which of the following conditions, if any, must a debtor meet to file a voluntary bankruptcy petition under Chapter 7 of the Federal Bankruptcy Code?
- Insolvency
- Three or more creditors
NO to BOTH. Neither is required. Almost anyone can file a voluntary petition for Chapter 7 relief at any time regardless of the number of creditors. The only restriction is that the filing is not a “substantial abuse,” but neither of these choices inherently indicates substantial abuse.
To file for bankruptcy under Chapter 7 of the Federal Bankruptcy Code, an individual must
- Have debts of any amount.
- Be insolvent.
- Be indebted to more than three creditors.
- Have debts in excess of $5,000.
Have debts of any amount. Debts must exist in some amount. Otherwise, there is nothing from which a person needs protection. However, there is no minimum amount of debt. So long as the filing is not a “substantial abuse of the process,” as when a millionaire tries to declare bankruptcy based on minor credit card debts, the filing is valid.
On February 28, 2005, Master, Inc., had total assets with a fair market value of $1,200,000 and total liabilities of $990,000. On January 15, 2005, Master made a monthly installment note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note.
On March 15, 2005, Master voluntarily filed a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold for less than the balance due on the note to Acme.
If a creditor challenged Master’s right to file, the petition would be dismissed:
- If Master had fewer than 12 creditors at the time of filing.
- Unless Master can show that a reorganization under Chapter 11 of the Federal Bankruptcy Code would have been unsuccessful.
- Unless Master can show that it is unable to pay its debts in the ordinary course of business or as they come due.
- If Master is an insurance company.
If Master is an insurance company. Chapter 7 relief may be sought by almost any person or company, provided that they have some outstanding debt. However, there are exceptions. Insurance companies may not file a voluntary petition for Chapter 7 relief.
Same applies to SLL’s, Credit Unions, SBA, RR & Municipalities
The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code
- Terminates liens on exempt property.
- Terminates all security interests in property in the bankruptcy estate.
- Stops the debtor from incurring new debts.
- Stops the enforcement of judgment liens against property in the bankruptcy estate.
Stops the enforcement of judgment liens against property in the bankruptcy estate. Once a bankruptcy petition is filed, the enforcement of any lien against this property is stopped pending a resolution through bankruptcy proceedings.
B is incorrect because a security interest is essentially a right to repossess collateral if a loan is not repaid. For example, when taking out a mortgage loan from a bank, the house is normally the collateral and may be seized by the lender if mortgage payments are not made. This interest is generally not terminated by the filing of an involuntary bankruptcy petition.
Which of the following statements is correct concerning what constitutes a debtor’s bankrupt property estate?
- The appreciated value, since the petition was filed, of the debtor’s stamp collection.
- A flat screen TV set purchased 30 days after the filing of the debtor’s petition.
- Property left to the debtor by her grandmother, who passed away nine months after the petition was filed.
- Wages earned within 180 days of the petition being filed.
The appreciated value, since the petition was filed, of the debtor’s stamp collection. The debtor’s property includes not only the original property value, but any value appreciation of that property after the petition is filed.
Which of the following is correct?
- A bankrupt accounting limited liability partnership can claim the same type and amount of exemptions as an individual bankrupt debtor.
- A debtor’s interest in a motor vehicle is not exempt.
- Since federal law generally governs bankruptcy proceedings, federal law exemptions take priority over state-law exemptions when both cover the same items.
- Unless the state has limited a bankrupt debtor to use of state-law exemptions, the debtor has a choice of using either state or federal-listed exemption laws.
Unless the state has limited a bankrupt debtor to use of state-law exemptions, the debtor has a choice of using either state or federal-listed exemption laws.
On February 28, 2005, Master, Inc. has total assets with a fair market value of $1.2mn and total liabilities of $990,000.
On January 15, 2005, Master made a monthly installment-note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment, having a fair market value greater than the balance due on the note. On March 15, 2005, Master voluntarily files a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment is sold for less than the balance due on the note to Acme.
Master’s payment to Acme could:
- Be set aside as a preferential transfer, because the fair market value of the collateral was greater than the installment-note balance.
- Be set aside as a preferential transfer, unless Acme showed that Master was solvent on January 15, 2005.
- Not be set aside as a preferential transfer, because Acme was oversecured.
- Not be set aside as a preferential transfer if Acme showed that Master was solvent on March 15, 2005.
Not be set aside as a preferential transfer, because Acme was oversecured. A payment is not preferential if it is not more than the creditor would have received in a bankruptcy proceeding. Since Acme has a perfected security interest, its rights are unaffected by the bankruptcy proceeding, and it retains the right to receive repayment of its debt without having the payments set aside.
Which of the following statements is correct?
- Failure of the debtor to attend (unless excused) the creditor’s meeting is a failure to co-operate and grounds for denial of the debtor’s discharge in a Chapter 7 bankruptcy.
- A written statement signed by the debtor that s/he has attended sessions with an approved credit-counseling agency is required as a duty of the debtor.
- If the court finds that a debtor meets the median-family-income test, the court cannot dismiss a Chapter 7 petition based on abuse.
- A copy of the debtor’s federal tax return for the most recent year prior to filing is not required, owing to the privacy right of the debtor.
Failure of the debtor to attend (unless excused) the creditor’s meeting is a failure to co-operate and grounds for denial of the debtor’s discharge in a Chapter 7 bankruptcy. Failure of the debtor to attend all hearings subject to bankruptcy proceedings is grounds for denial of discharge of the debtor’s debts. A debtor is usually required to appear at a creditor’s meeting and may, under oath, be examined for information, such as the amount and whereabouts of assets. Such failure to appear is deemed a failure to co-operate.
One of the requirements for the debtor’s filing of a Chapter 7 petition is to include a certificate from an approved credit-counseling agency attesting to his or her attendance at said agency.
On May 1, 2003, two months after becoming insolvent, Quick Corp., an appliance wholesaler, files a voluntary petition for bankruptcy under the provisions of Chapter 7 of the Federal Bankruptcy Code. On October 15, 2002, Quick’s Board of Directors had authorized and paid Erly $50,000 to repay Erly’s April 1, 2002, loan to the corporation. Erly is a sibling of Quick’s president. On March 15, 2003, Quick paid Kray $100,000 for inventory delivered that day.
Which of the following is not relevant in determining whether the repayment of Erly’s loan is a voidable preferential transfer?
- Erly is an insider.
- Quick’s payment to Erly was made on account of an antecedent debt.
- Quick’s solvency when the loan was made by Erly.
- Quick’s payment to Erly was made within one year of the filing of the bankruptcy petition.
Quick’s solvency when the loan was made by Erly. Solvency at the time the debt is incurred has nothing to do with whether payments made to Erly now are preferential. To be a preferential payment, the debt must only have been antecedent (incurred before the bankruptcy petition was filed), and insolvency of the debtor determined at time of payment.
If a creditor is an insider, the creditor cannot receive a preferential payment within one year of the filing of the bankruptcy petition from an insolvent debtor. An insider is someone who has a close relationship with the debtor. Business associates are often classified as insiders.
Under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code, certain property acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate.
An example of such property is
- Municipal-bond interest received by the debtor within 180 days of the filing of the petition.
- Alimony received by the debtor within one year of the filing of the petition.
- Social Security payments received by the debtor within 180 days of the filing of the petition.
- Gifts received by the debtor within one year of the filing of the petition.
Municipal-bond interest received by the debtor within 180 days of the filing of the petition.
A debtor’s estate in bankruptcy consists of all tangible and intangible property of the debtor held at the commencement of the bankruptcy proceedings. In addition, the estate consists of any after-acquired income from such property.
Therefore, interest from municipal bonds (held as part of the estate) also becomes part of the estate. Any gifts received within 180 days of the filing the petition also become part of the estate. All other payments received after the filing of the petition are not considered income from the existing debtor’s (bankruptcy) estate.
Therefore, B and C are incorrect, because they are payments received after the filing of the petition, and are not considered income from the existing debtor’s (bankruptcy) estate.
D is incorrect, because it is a gift received more than 180 days after the filing of the petition.
Under the federal Bankruptcy Code, which of the following rights or powers does a trustee in bankruptcy not have?
- The power to prevail against a creditor with an unperfected security interest.
- The power to require persons holding the debtor’s property at the time the bankruptcy petition is filed to deliver the property to the trustee.
- The right to use any grounds available to the debtor to obtain the return of the debtor’s property.
- The right to avoid any statutory liens against the debtor’s property that were effective before the bankruptcy petition was filed.
The right to avoid any statutory liens against the debtor’s property that were effective before the bankruptcy petition was filed. This answer is correct, because although the trustee can avoid some statutory liens (such as landlord’s lien), the trustee cannot avoid all (key word is “any”) statutory or common law liens (such as certain warehouse liens).
On February 28, 2005, Master, Inc. has total assets with a fair market value of $1.2mn and total liabilities of $990,000.
On January 15, 2005, Master made a monthly installment-note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note.
On March 15, 2005, Master voluntarily files a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold to Acme for less than the balance due on the note .
Which of the following statements correctly describes Acme’s distribution from Master’s bankruptcy estate?
- Acme will receive the total amount it is owed, even if the proceeds from the sale of the collateral were less than the balance owed by Master.
- Acme will have the same priority as unsecured general creditors, to the extent that the proceeds from the sale of its collateral are insufficient to satisfy the amount owed by Master.
- The total proceeds from the sale of the collateral will be paid to Acme, even if they are less than the balance owed by Master, provided there is sufficient cash to pay all administrative costs associated with the bankruptcy.
- Acme will receive only the proceeds from the sale of the collateral in full satisfaction of the debt owed by Master.
Acme will have the same priority as unsecured general creditors, to the extent that the proceeds from the sale of its collateral are insufficient to satisfy the amount owed by Master. If this sale does not generate enough to cover the entire debt, then Acme becomes a general creditor for that portion of the debt. A perfected secured creditor only has a special priority right to the security interest, or collateral. When the collateral has been disposed of, it must wait in line for further payments with everyone else.
Which of the following claims would have the highest priority in the distribution of a bankruptcy estate under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code if the petition was filed June 1, 2005?
- Federal tax lien filed May 15, 2005.
- A secured debt properly perfected on February 10, 2005.
- Trustee’s administration cost filed September 30, 2005.
- Employee wages due March 30, 2005.
A secured debt properly perfected on February 10, 2005. A secured creditor with a perfected interest will generally have top priority. After secured creditors are paid, the bankruptcy code sets forth an order of importance for unsecured creditors. The administrative expenses would come first among the unsecured claims, followed by the wages, and the tax lien would come last.
In a voluntary bankruptcy proceeding under Chapter 7 of the Federal Bankruptcy Code, which of the following claims, filed within 90 days of the filing for bankruptcy, will be paid first?
- Unsecured federal taxes.
- Utility bills up to $1,000.
- Voluntary contributions to employee benefit plans.
- Employee vacation and sick pay up to $2,000 per employee.
Employee vacation and sick pay up to $2,000 per employee. The bankruptcy establishes an order of priority for claims like these. After administrative expenses are paid, unpaid wages earned for 90 days prior to filing of the petition, up to $10,950 per employee, are paid; then, unpaid contributions to employee benefit plans, up to $10,950 per employee, are paid; then, taxes are paid; lastly, utility bills with the general creditors are paid.
Distribution Priorities
- Secured creditors
- Claims for child support and alimony
- Administration costs (attorney’s fees and cpa fees, etc. related to the bankruptcy procedings.
- Employee wages (not officers)
- 12,475 max
- 3 months preceding petition
- Contributions to employee benefit plans
- 12,475 max
- 6 months preceding petition
- Storing grain
- Consumer deposits
- Taxes
- Unsecured creditors
Under Chapter 7 of the Federal Bankruptcy Code, what affect does a bankruptcy discharge have on a judgment creditor when there is no bankruptcy estate?
- The judgment creditor’s claim is non-dischargeable.
- The judgment creditor retains a statutory lien against the debtor.
- The debtor is relieved of any personal liability to the judgment creditor.
- The debtor is required to pay a liquidated amount to vacate the judgment.
The debtor is relieved of any personal liability to the judgment creditor. Unless the debtor has been denied a discharge decree owing either to an act of the debtor (such as fraud, intentional concealment of assets, and the like), or where, by statute, the debt is not discharged (such as in the case of unpaid taxes), the discharge decree releases the debtor from personal liability for debts owed to his or her creditors.
A judgment creditor’s debt is dischargeable and therefore is not on the statutory list of non-dischargeable debts.
Which of the following acts by a debtor could result in a bankruptcy court revoking the debtor’s discharge?
- I. Failure to list one creditor.
- II. Failure to answer correctly material questions on the bankruptcy petition.
II Only…A discharge is usually final. It will be revoked only if later evidence suggests that the debtor acted fraudulently or intentionally misled the bankruptcy court. Failure to list one creditor is probably not a fraudulent action, particularly if there are many creditors. Failing to answer important questions honestly and accurately may well indicate fraud.
In general, which of the following debts will be discharged under the voluntary-liquidation provisions of Chapter 7 of the Federal Bankruptcy Code?
- A debt incurred owing to the negligence of the debtor, arising before the filing of the bankruptcy petition.
- Alimony payments owed to the debtor’s spouse under a separation agreement entered into two years before the filing of the bankruptcy petition.
- A debt incurred more than 90 days before the filing of the bankruptcy petition and not disclosed in the petition.
- Income taxes due up to two years before the filing of the bankruptcy petition.
A debt incurred owing to the negligence of the debtor, arising before the filing of the bankruptcy petition. So long as the debt itself has arisen before the filing, it will usually be discharged if it is based on simple negligence. Note that debts arising involving intoxication are not discharged by a Chapter 7 proceeding.
A claim will not be discharged in a bankruptcy proceeding if it
- Is brought by a secured creditor and remains unsatisfied after receipt of the proceeds from the disposition of the collateral.
- Is for unintentional torts that resulted in bodily injury to the claimant.
- Arises from an extension of credit based upon false representations.
- Arises out of the breach of a contract by the debtor.
Arises from an extension of credit based upon false representations. Claims based on fraud or other intentional wrongdoing by the debtor will not be discharged. If a debtor commits fraud, that debtor cannot take advantage of the bankruptcy laws when it comes time to pay the defrauded party.
Chapter 7 of the Federal Bankruptcy Code will deny a debtor a discharge when the debtor
- Makes a preferential transfer to a creditor.
- Accidentally destroys information relevant to the bankruptcy proceeding.
- Obtains a Chapter 7 discharge ten years previously.
- Is a corporation or a partnership.
Is a corporation or a partnership. Corporations and partnerships may go through a Chapter 7 liquidation, but do not qualify for a general discharge from all remaining debts as natural persons do.
Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, which of the following statements applies to a person who has voluntarily filed for and received a discharge in bankruptcy?
- The person will be discharged from all debts.
- The person can obtain another voluntary discharge in bankruptcy under Chapter 7 after three years have elapsed from the date of the prior filing.
- The person must surrender for distribution to the creditors amounts received as an inheritance, if the receipt occurs within 180 days after filing the bankruptcy petition.
- The person is precluded from owning or operating a similar business for two years.
The person must surrender for distribution to the creditors amounts received as an inheritance, if the receipt occurs within 180 days after filing the bankruptcy petition. After Chapter 7 liquidation proceedings begin, all non-exempt property at the time of the filing of the petition of the debtor becomes part of the distribution to creditors. In addition, some interests, including inheritances acquired by the debtor within 180 days of filing a voluntary petition, become a part of the debtor’s estate for distribution.
Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, a debtor will be denied a discharge in bankruptcy if the debtor
- Fails to list a creditor.
- Owes alimony and child support payments.
- Cannot pay administration expenses.
- Refuses satisfactorily to explain a loss of assets.
Refuses satisfactorily to explain a loss of assets. Generally, a bankrupt debtor, at the end of bankruptcy proceedings, will receive a discharge decree. Unless the debtor has committed an act such as fraud, intentional concealment of assets, refusal to explain the loss of assets, and the like, is a partnership or corporation, or the debtor has received a discharge decree within eight years of the current filing petition, the discharge decree will be granted. Here, the debtor has committed an act, has refused satisfactorily to explain a loss of assets, and as such will be denied a discharge decree in bankruptcy.