Chapter Seven: Bankruptcy
8. (c) In a reorganization, the debtor submits the plan to a committee of unsecured creditors. Answers (a) and (d) are incorrect because a trustee is not required in a reorganization. Thus, a trustee need not be selected by the creditors’ committee and the plan does not require approval of a trustee. Answer (b) is incorrect because a plan may also be filed by the creditors or the trustee if one was appointed, after 120 days.
9. (a) A liquidation occurs under Chapter 7, but does not occur under a Chapter 11 reorganization. Answers (b), (c) and (d) are incorrect because a filing of a reorganization plan, conformation of the plan by the court and the opportunity for each class of claims to accept the plan are all provisions of a reorganization.
10. (d) The commencement of a Chapter 11 reorganization may be either voluntary or involuntary. Answer (a) is incorrect because a trustee is not required in a reorganization, although the creditors may request that one be appointed. Answer (b) is incorrect because there is no requirement that the debtor be insolvent in a voluntary reorganization. Answer (c) is incorrect because the debtor has exclusive rights to file the plan for 120 days after the order for relief.
11. (a) A reorganization plan will not be confirmed by the court until provisions are made for full payment of administration costs. Answer (b) is incorrect because acceptance of the plan is not required by all classes of claimants. Answer (c) is incorrect because liquidation does not occur in a reorganization and therefore no contingency plan of liquidation is required. Answer (d) is incorrect because appointment of a trustee is not required for a reorganization.
12. (c) Property of the debtor as of the filing date goes to the trustee to pay creditors. Social security benefits and disability benefits are specifically exempt. Only answer (c) states that both social security benefits and disability benefits are exempt property.
13. (a) Property gained by the debtor after the filing, the debtor may keep. Specific exceptions include property gained by divorce, inheritance and insurance within 180 days after the filing, which go to the trustee for creditors. Thus, answer (a) is correct because it is life insurance and was within 180 days after filing. Answers (b) and (c) are incorrect because the inheritance and the divorce settlement were received more than 180 days after filing. Answer (d) is incorrect because most property (to include wages) gained by the debtor after filing , the debtor gets to keep.
14. (b) A trustee may reject a lease, assume and retain a lease, or assume and assign a lease. If the trustee does not take any action in 60 days, the lease is rejected. Answer (b) is correct because the trustee may elect not to assume the lease. Answers (a), (c) and (d) are incorrect because a trustee does have a choice with leases and may reject the lease.
15. (c) Property gained by the debtor after the filing, the debtor may keep. Specific exceptions include property gained by divorce, inheritance and insurance within 180 days after the filing, which go to the trustee for creditors. Thus, property received as an inheritance within 180 days after filing must be surrendered for distributions to creditors. Answer (a) is incorrect because certain debts are excepted from discharge in bankruptcy (unscheduled debts, fraud, alimony and child support, willful and malicious injury and taxes owed within three years of filing, etc.). Answer (b) is incorrect because six years must elapse before another discharge in bankruptcy may occur. Answer (d) is incorrect because a person may own a similar business immediately after obtaining a discharge in bankruptcy.
16. (d) A preferential transfer requires that five tests be met (TANIM): a Transfer that benefited a creditor, for an Antecedent debt, made within Ninety days prior to filing (up to 1 year prior to filing if the creditor was an insider), made while the debtor was Insolvent and the creditor wound up with More than they would have received in bankruptcy. Prepaying an installment loan within ninety days of filing would benefit a creditor, would be for an antecedent debt, would be within ninety days, would be presumed to have been made while the debtor was insolvent (since it occurred within 90 days) and prepayment certainly allowed the creditor to get more than they would have received in bankruptcy. Answer (a) is incorrect because making a gift to charity would not be an antecedent debt. Answer (b) is incorrect because paying a utility bill would constitute payment of a current bill in the ordinary course of business and would be exempt. Additionally, it would probably be a consumer debt of less
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than $600. Answer (c) is incorrect because borrowing money secured by a mortgage would not be an antecedent debt, but rather a new debt (a contemporaneous exchange for new value).
17. (a) A preferential transfer requires that five tests be met (TANIM): a Transfer that benefited a creditor, for an Antecedent debt, made within Ninety days prior to filing (up to 1 year prior to filing if the creditor was an insider), made while the debtor was Insolvent and the creditor wound up with More than they would have received in bankruptcy. Thus, it requires that debtor was insolvent at the time of transfer. Answer (b) is incorrect because the creditor need not be an insider if the transfer was made within 90 days. Answer (c) is incorrect because a contemporaneous exchange for new value is not an antecedent debt. Answer (d) is incorrect because a transfer made by a debtor to hinder, delay or defraud creditors is not a requirement for a preferential transfer. Such a transfer would be a fraudulent transfer and may be set aside by the trustee if it occurred within one year prior to the filing.
18. (d) An insurance company, a bank or a savings and loan can not file for bankruptcy under either Chapter 7 or Chapter 11. Thus, if Masters was an insurance company the petition for a voluntary bankruptcy under Chapter 7 would be dismissed. Answers (a) and (c) are incorrect because all a debtor needs to voluntarily file for bankruptcy are debts of any amount. There are no required number of creditors or the requirement of the inability to pay debts as they become due (as there is in involuntary bankruptcy). Answer (b) is incorrect because Chapter 7 does not require the debtor to show that a reorganization would be unsuccessful.
19. (c) Filing of a bankruptcy petition acts as an automatic stay of all collection efforts with the exception of alimony, child support and criminal actions. Thus, lawsuits by Master’s creditors will be stayed. Answer (a) is incorrect because Master may only continue its business under a reorganization, not under a Chapter 7 voluntary bankruptcy. Answer (b) is incorrect because the interim trustee is appointed by the court, not the creditors. Answer (d) is incorrect because there is no requirement that the unsecured creditors elect a creditors committee, although they may do so if they choose.
20. (c) A preferential transfer requires that five tests be met (TANIM): a Transfer that benefited a creditor, for an Antecedent debt, made within Ninety days prior to filing (up to 1 year prior to filing if the creditor was an insider), made while the debtor was Insolvent and the creditor wound up with More than they would have received in bankruptcy. The transfer to Acme was not preferential. Acme was a properly perfected secured creditor.
Master’s payment on January 15 was a payment of a current bill in the ordinary course of business and was therefore not an antecedent debt. The mere fact that the debt was over- secured, would not make this a preferential transfer or an improper security interest. Many first mortgages on real estate involve debts that are over-secured, for example. Answers (a) and (b) are incorrect because this payment is not a preferential payment. Answer (d) is incorrect because the debtor must be insolvent on the date of the transfer (January 15), not the date of the filing (March 15).
21, 22 and 23. ANALYSIS. There are eleven categories of debts (DAM-WEG-CTFI), the ten enumerated categories plus the general creditors divided into secured and unsecured claims. All category 1 debts are paid first, then category 2 debts are paid, and so on. The order of priority is: (1) Domestic support obligations; (2) Administrative costs of the bankruptcy, (3) Middleman debts (gap creditors); (4) Wages unpaid: (5) Employee benefits unpaid; (6) Grain producers and fisherman unpaid; (7) Consumer creditor deposits unpaid; (8) Taxes unpaid; (9) Federal depository institution commitments unpaid; (10) Death or injury from intoxicated operation of a motor vehicle; then (11) Secured debts, followed by all other debts. Dart would be a category 3 (Middleman) debt, because the debt occurred after the filing but before the order for relief. The trustee’s fee would be a category 2 debt because it is an administrative cost of the bankruptcy proceeding. The claim by Boyd was a category 7 debt because it was a deposit for consumer goods. Noll was a properly perfected secured creditor and thus is a category 11 debt. The fees earned by the attorney are a category 2 debt because they are an administrative cost of the bankruptcy proceeding. Claims by unsecured general creditors would also be a category 11 debts, but they would be payable after the secured creditors.
21. (b) Based on the prior analysis, the trustee’s fee is a category 2 debt in the amount of $15,000 and the attorney’s fee is a category 2 debt in the amount of $10,000. If there is only $15,000 available for distribution for category 2 claims, then the amount available for the trustee would be 15/25 or 60% of the available cash ($15,000).
The correct answer is $9,000, which is choice (b).
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22. (d) Based on the prior analysis, the trustee would receive $15,000 and the attorney would receive $10,000 as category 2 debts. Leaving $25,800. Next would be the claim by Dart as a category 3 creditor in the amount of
$20,000, leaving $5,800 available to pay lower priority debts. The next priority item would be Boyd as a category 7 debt. Since the amount of Boyd’s claim is $1,500 and that does not exceed the cash available, Boyd would receive the full $1,500.
23. (c) Based on the prior analysis, the trustee would receive $15,000 and the attorney would receive $10,000 as category 2 debts. Leaving $16,000. Next would be the claim by Dart as a category 3 (Middleman) creditor in the amount of $20,000. Since there is only $16,000 available to pay category 3 debts, Dart would receive the entire
$16,000.
24. (d) In an involuntary bankruptcy, if the debtor has less than twelve creditors, only one or more creditors are required to file, owed $12,300 or more in unsecured claims. Dart had five creditors. Decoy was owed $14,000, of which $2,000 was secured and the balance of $12,000 was unsecured. Thus, Decoy could not file alone because there were less than twelve creditors, but Decoy did not meet the requirement of $12,3000 in unsecured claims.
Answers (a) and (b) are incorrect because either JOG or Nanstar must join in Decoy's filing, but both are not required. Answer (c) is incorrect because the value of JOG and Nanstar's claims combined do not satisfy the
$12,300 requirement. The only correct answer is (d).
25. (c) The test for involuntary bankruptcy is either not generally paying debts as they become due or that a custodian was appointed or took possession of most of the debtor’s property within 120 days preceding the filing.
Dart would lose because they were not paying their debts when due. Answer (a) is incorrect because the petition could have been filed under either Chapter 7 or Chapter 11 if the debtor was not paying debts when due. Answer (b) is incorrect because with less than twelve creditors only one or more are required to file having unsecured claims of
$10,775 or more. There is no requirement that the debtor have twelve or more creditors. Answer (d) is incorrect because the mere fact that the IRS has a judgment does not mean that the debtor was not generally paying debts when due.
26. (a) Upon filing of a petition for involuntary bankruptcy the court will appoint an interim trustee. Filing will also act as an automatic stay and stop all collection efforts with the exception of alimony, child support and criminal actions. Only answer (a) reflects that a trustee will be appointed and a stay against creditor collection proceedings will go into effect.
27, 28 and 29 ANALYSIS. There are eleven categories of debts (DAM-WEG-CTFI), the ten enumerated categories plus the general creditors divided into secured and unsecured claims. All category 1 debts are paid first, then category 2 debts are paid, and so on. The order of priority is: (1) Domestic support obligations; (2) Administrative costs of the bankruptcy, (3) Middleman debts (gap creditors); (4) Wages unpaid: (5) Employee benefits unpaid; (6) Grain producers and fisherman unpaid; (7) Consumer creditor deposits unpaid; (8) Taxes unpaid; (9) Federal depository institution commitments unpaid; (10) Death or injury from intoxicated operation of a motor vehicle; then (11) Secured debts, followed by all other debts. The IRS would be a category 8 debt. The next items in priority would be the category 11 secured creditors, then the unsecured creditors. Fracon would be a secured creditor for the $70,000 sales price of the property. Decoy would be a secured creditor for the $2,000 of their secured claim. This leaves $16,000 left to pay the unsecured creditors.
Fracon is owed $5,000 of the deficiency, and Decoy is owed $12,000 its deficiency. JOG is owed $3,000 and Nanstar is owed $1,200. The total amount of unsecured claims is $21,200.
27. (a) Based on prior analysis Nanstar will receive nothing. As a creditor who did not timely file, Nanstar would only be paid after all other creditors listed were paid in full. There is insufficient funds to pay the other four creditors in full. Only answer (a) reflects that Nanstar will receive nothing.
28. No choice. Based on the prior analysis, Fracon would receive (5/21.2) of the $5,000 it is owned on the unsecured claim, which is $1180. When combined with the amount paid on the secured claim ($70,000), Fracon would receive a total of $71,180.
29. (d) Based on the prior analysis, the IRS is a category 8 debt, which is the highest priority item in this case.
Therefore the IRS would receive the full $12,000 owed.
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30. (d) There are ten categories of debts (SAM - WEG - CAT). All category 1 debts are paid first, then category 2 debts are paid, and so on. The order is Secured creditors, Administrative costs of bankruptcy, Middleman debts (gap creditors), Wages unpaid, Employee benefits unpaid, Grain producers and fishermen unpaid, Consumer creditor deposits unpaid, Alimony and Child support unpaid, Taxes unpaid and then all other debts. Unsecured federal taxes would be a category nine debt. Utility bills would be a category ten debt. Voluntary contributions to employee benefit plans would be a category five debt. The employee vacation and sick pay would be wages, since they are compensation. Unpaid wages earned within 90 days of filing are a category four debt and would have the highest priority. Note that this would be true only if earned within 90 days and the fact pattern states that these claims were incurred within 180 days prior to the filing, leaving it unclear as to whether the claim receives a priority or not. This is a poorly drafted question for this reason, but the AICPA only accepted answer (d).
31. (b) There are eleven categories of debts (DAM-WEG-CTFI), the ten enumerated categories plus the general creditors divided into secured and unsecured claims. All category 1 debts are paid first, then category 2 debts are paid, and so on. The order of priority is: (1) Domestic support obligations; (2) Administrative costs of the bankruptcy, (3) Middleman debts (gap creditors); (4) Wages unpaid: (5) Employee benefits unpaid; (6) Grain producers and fisherman unpaid; (7) Consumer creditor deposits unpaid; (8) Taxes unpaid; (9) Federal depository institution commitments unpaid; (10) Death or injury from intoxicated operation of a motor vehicle; then (11) Secured debts, followed by all other debts. The inventory purchased on August 1, 1993 was a category 3 claim (Middleman) and would be the first item paid. The employee wages are a category 4 claim. The federal tax lien is a category 8 claim. The secured debt is a category 11 claim.
32. (b) A denial in discharge can occur for an unjustifiable failure to keep adequate books and records, having received a previous discharge in bankruptcy within six years of filing, attempting to hide assets within one year of filing, making false oath or claim in the bankruptcy proceeding and refusing to obey a lawful court order or refusing to satisfactorily explain a loss of assets. Only answer (b) (unjustifiable failure to keep adequate books and records) states a grounds for denial of discharge.
33. (d) A denial in discharge can occur for refusing to obey a lawful court order or refusing to satisfactorily explain a loss of assets, an unjustifiable failure to keep adequate books and records, having received a previous discharge in bankruptcy within six years of filing, attempting to hide assets within one year of filing, and making false oath or claim in the bankruptcy proceeding. Only answer (d) (refusing to adequately explain a loss of assets) states a grounds for denial of discharge.
34. (c) A secured creditor is only protected as to the value of their collateral. If the collateral is insufficient to satisfy their debt, they are a category ten creditor for the deficiency and the debt is dischargeable. Thus, Eagle’s debt would be discharged even if the sale of the collateral was insufficient to pay the debt. Answers (a) and (d) are incorrect because receiving a previous discharge within six years of filing and unjustifiable failure to keep adequate books and records are grounds for a denial of discharge. Answer (b) is incorrect because an unscheduled debt (where the creditor has no notice of bankruptcy) is excepted from discharge.
35. (a) Debts excepted from discharge in bankruptcy include unscheduled debts where the creditor has no notice of the bankruptcy, fraud, alimony and child support, debts from causing willful and malicious injury to others and taxes owed within three years of filing. Thus, a claim arising from alimony or maintenance would not be discharged. Answer (b) is incorrect because debts for breach of contract are dischargeable. Answer (c) is incorrect because secured creditors are only protected as to the value of their collateral. They are a category ten creditor for any deficiency upon sale of the collateral and the debt is dischargeable. Answer (d) is incorrect because only claims from causing willful and malicious injury are excepted from discharge, not debts from negligently causing injury.
36. (d) Debts excepted from discharge in bankruptcy include unscheduled debts where the creditor has no notice of the bankruptcy, fraud, alimony and child support, debts from causing willful and malicious injury to others and taxes owed within three years of filing. Thus, a claim arising from alimony would not be discharged. Answers (a), (b) and (c) are incorrect because debts for credit card charges, bank loans and medical expenses are all dischargeable in bankruptcy.
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37. (c) Debts excepted from discharge in bankruptcy include unscheduled debts where the creditor has no notice of the bankruptcy, fraud, alimony and child support, debts from causing willful and malicious injury to others and taxes owed within three years of filing. A claim arising from an extension of credit based on false representations would be fraud and would not be dischargeable. Answer (a) is incorrect because secured creditors are only protected as to the value of their collateral. They are a category ten creditor for any deficiency upon sale of the collateral and the debt is dischargeable. Answer (b) is incorrect because only claims from causing willful and malicious injury are excepted from discharge, not debts from negligently causing injury. Answer (d) is incorrect debts for breach of contract are dischargeable.
38. (a) Debts excepted from discharge in bankruptcy include unscheduled debts where the creditor has no notice of the bankruptcy, fraud, alimony and child support, debts from causing willful and malicious injury to others and taxes owed within three years of filing. Debts due to the debtor’s negligence would be dischargeable.
Answers (b), (c) and (d) are incorrect because alimony, unscheduled debts and taxes due within three years of the filing are not dischargeable.
39. (b) A court may revoke a discharge in bankruptcy granted within one year for fraud by the debtor in obtaining the discharge, fraudulently failing to report acquisition of property, refusal of the debtor to testify or obey a lawful court order, or failure to answer correctly material questions on the bankruptcy petition. Failure to list one creditor would not be a ground for revocation of discharge, it is a debt excepted to discharge (if the creditor had no notice of the bankruptcy proceeding). Only answer (b) states that failure to list one creditor is not a ground for revoking a discharge, but failure to correctly answer material questions on the bankruptcy petition is a proper ground for revocation.
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