CHAPTER 16-BANKRUPTCY
TRUE/FALSE
1. Under all chapters of the Bankruptcy Code, most of the debtor’s assets are distributed to
creditors and the debtor has no obligation to share future earnings with creditors.
Answer: False
2. Peggy’s credit card debts are mounting as her costs of insurance and fuel have dramatically
increased and her income, from sporadic free-lance jobs, has dropped. Chapter 13 of the
Bankruptcy Code will allow her to reorganize her debt while she keeps most of her assets.
Answer: False
3. Generally, filing bankruptcy stops the collection activity of creditors.
Answer: True
4. Brad was having financial difficulties and thought bankruptcy might be in his future. He
transferred his sports car to his brother with the agreement that if he didn’t file for bankruptcy
within the next 18 months, his brother would return the car to him. Brad did file for
bankruptcy in ten months. The bankruptcy trustee can bring the car back into Brad’s estate for
the purpose of providing assets for Brad’s creditors.
Answer: True
5. Bankruptcy is regulated by federal law.
Answer: True
6. Chapter 7 bankruptcy petitions may only be filed voluntarily..
Answer: False
7. In Chapter 11 only the debtor may propose plans of reorganization.
Answer: False
8. Creditor claims are divided into classes and the highest class must be satisfied in full
before going to the next category.
Answer: True
9. The Bankruptcy Code uses the term “bankrupt” to refer to a person who cannot pay his
debts.
Answer: False
10. Chapters 11 and 13 are liquidation chapters.
Answer: False
11. Alimony and child support obligations are considered priority claims.
Answer: True
12. Individual debtors are allowed to keep some assets in a Chapter 7 bankruptcy.
Answer: True
13. Francesca cannot serve as a trustee in a bankruptcy case because she is not a lawyer.
Answer: False
14. Shoe Sunshine, Inc. filed for bankruptcy protection under Chapter 11 and submitted a
plan of reorganization within 120 days after filing for relief. Two of the classes of creditors
voted against the plan. However, the bankruptcy judge considered the plan to be reasonable,
achievable, and fair, and approved it in spite of these creditors' objections. This action by the
judge is called a "cramdown."
Answer: True
15. In a Chapter 13 bankruptcy, creditors cannot force a debtor into bankruptcy; nor can they
vote to confirm or reject a plan of reorganization.
Answer: True
MULTIPLE CHOICE
1. The start of the bankruptcy process is:
a. the submission of a plan of repayment.
b. the bankruptcy court’s issuance of an order for relief.
c. a meeting of creditors.
d. the appointment of a trustee.
Answer: B
2. Which of the following is a primary goal of bankruptcy:
a. to preserve as much of the debtor's property as possible.
b. to divide the debtor's assets fairly between the debtor and the creditors.
c. to divide the debtor's assets fairly among the creditors.
d. All of the above.
Answer: D
3. Debts that cannot be discharged in bankruptcy include all EXCEPT:
a. alimony.
b. income taxes.
c. negligence judgments.
d. fraud judgments.
Answer: C
4. Chapter 13 bankruptcy:
a. is used by businesses to reorganize their financial situations.
b. is an involuntary bankruptcy.
c. can be used only by individuals with a regular source of income.
d. is used by businesses to liquidate their debts.
Answer: C
5. Andy's business is not able to pay its debts, and the prospects for its finances to improve
are slim. Andy decides not to continue the business. In this case, Andy should file a voluntary
petition for which type of bankruptcy?
a. Chapter 7.
b. Chapter 11.
c. Chapter 13.
d. Chapter 12.
Answer: A
6. The bankruptcy designed for family farmers is:
a. Chapter 7.
b. Chapter 9.
c. Chapter 11.
d. Chapter 12.
Answer: D
7. Link negligently ran his car into John, causing $50,000 in injuries. Link was intoxicated at
the time of the accident. Can Link discharge this debt in bankruptcy?
a. Yes, claims based on negligence are dischargeable.
b. Yes, as long as he didn't intend to hit John's car.
c. No, such claims are not dischargeable in bankruptcy.
d. No, because Link breached a fiduciary duty.
Answer: C
8. Which of the following cannot file a bankruptcy petition under the Code?
a. Aztec, a foreign corporation doing business in the United States.
b. Milan, a citizen of Bosnia, who owns property in the United States.
c. Debra, a resident of Michigan, whose liabilities do not exceed assets.
d. Stan, an American citizen, who refuses to undergo credit counseling.
e. All of the above.
Answer: D
9. Which of the following statements concerning a Chapter 11 reorganization plan is true?
a. A reorganization plan will be confirmed by the court only if a majority of each class of
creditors votes in favor of the plan.
b. A reorganization plan can be confirmed by the court over objections of some creditors if
the court determines that the plan is feasible and fair.
c. Only the bankruptcy court has the authority to confirm or reject the reorganization plan.
Creditors do not have a right to vote on the plan.
d. A reorganization plan binds only the debtor and not the creditors.
Answer: B
10. Creditors of Northern Hydraulics file an involuntary bankruptcy petition against it.
Northern continues to operate its business until the court officially acknowledges that
Northern is under the jurisdiction of the court. Any expenses Northern incurs in the ordinary
course of business during this gap period are:
a. priority claims.
b. administrative expenses of the bankruptcy.
c. unsecured claims.
d. secured claims.
Answer: A
11. Ramona has received a discharge in bankruptcy, but wants to reaffirm a debt to her sister.
To be valid, the reaffirmation:
a. will be scrutinized by the court to make sure her sister has not unfairly pressured Ramona.
b. will be automatically disallowed because allowing Ramona to promise to pay a discharged
debt would be contrary to the goals of the bankruptcy proceedings.
c. will be automatically allowed if Ramona voluntarily chooses to make it.
d. must clearly disclose that Ramona has the right to rescind at any time since the debt was
already discharged.
Answer: A
12. Iris received a discharge under a Chapter 7 bankruptcy. She cannot receive another
discharge under Chapter 7 for at least:
a. six years after the prior filing.
b. eight years after the prior filing.
c. ten years after the prior discharge.
d. She cannot file another Chapter 7, but could file a Chapter 11 or 13 bankruptcy.
Answer: B
13. Grand Lighting Co. has filed a petition for voluntary bankruptcy under Chapter 7 of the
Code. The following property will be exempt from the bankruptcy process:
a. work tools.
b. up to three company cars.
c. up to $20,200 in the value of the company’s real property.
d. All of the above.
e. None of the above.
Answer: E
14. Kathleen filed for voluntary bankruptcy and the automatic stay went into effect. The
automatic stay:
a. acts to automatically discharge Kathleen's debts.
b. stops any and all acts to collect, assess, or recover a claim against Kathleen that arose
before she filed bankruptcy.
c. stops only secured creditors from taking any act to collect, assess, or recover a claim
against Kathleen that arose before she filed bankruptcy.
d. stops creditors from trying to collect from Kathleen, but it does not stop them from filing
lawsuits against her.
Answer: B
15. Which of the following is a requirement for an involuntary Chapter 7 bankruptcy
petition?
a. The debtor must owe at least $150,000 in unsecured claims to the creditors who file.
b. The debtor must have at least three creditors join in the petition if the debtor has 12 or
more creditors. If the debtor has fewer than 12 creditors, any single creditor or group can file
a petition.
c. The creditors must have tried to help the debtor overcome the financial difficulties.
d. The debtor must have a majority of the creditors file the petition.
Answer: B
16. Which of the following actions would prevent a discharge of debts under Chapter 7?
a. Discharge under Chapters 7 or 11 within the past eight years.
b. Falsified records presented to bankruptcy court by debtor.
c. Failure to disclose assets.
d. All of the above would prevent a discharge of debts.
Answer: D
17. Kylie filed a Chapter 7 bankruptcy petition in which she exempted her home, valued at
$125,000. Kylie can exempt her entire home from all creditors if:
a. she claims her exemptions under the federal Bankruptcy Code.
b. she lives in a state that allows for an exemption amount of $125,000 or more.
c. she lives in a state that allows an exemption amount of $125,000 or more, she has lived in
that state for at least two years prior to the bankruptcy, and there are no secured creditors with
perfected liens against the home.
d. None of the above.
Answer: C
18. Esmeralda is a debtor in a Chapter 7 bankruptcy proceeding. Which of the following is
not a duty of Esmeralda under Chapter 7?
a. To undergo credit counseling with an approved agency before filing.
b. To provide a repayment schedule for the debt owed to each creditor listed on the creditor
list.
c. To provide a list of all her assets and debts.
d. To provide a schedule of all her income and expenditures.
Answer: B
19. Forever Yours, Inc. has a secured and perfected security interest in Sally's big-screen TV.
On the filing date of Sally's Chapter 7 petition, the balance of the debt owed to Forever Yours
is $2,000. The value of the TV is estimated at $1,500. This means that Forever Yours:
a. is secured for the entire debt, $2,000.
b. is unsecured for $500, the excess of the debt over the value of the TV.
c. has a high priority claim of $500. This means that Forever Yours, Inc. will be allowed $500
worth of other unsecured property before other unsecured creditors get anything.
d. is unsecured for the entire debt.
Answer: B
20. The correct order of payment of claims from the debtor's estate would be:
a. secured claims, priority claims, unsecured claims.
b. secured claims, unsecured claims, priority claims.
c. priority claims, secured claims, unsecured claims.
d. priority claims, unsecured claims, secured claims.
Answer: A
21. A Chapter 7 debtor's agreement to pay a creditor on a debt after receiving a discharge in
bankruptcy is called a:
a. voidable preference.
b. reaffirmation.
c. fresh start.
d. redemption.
Answer: B
22. Under what circumstances might the court reject a debtor's Chapter 13 plan?
a. The plan requires future earnings to pay off debts.
b. The plan promises to pay all secured and priority claims.
c. The plan anticipates paying the unsecured creditors less than what they would get under
Chapter 7.
d. The plan treats all unsecured classes equally.
Answer: C
23. Which of the following would not be considered a fraudulent conveyance or a voidable
preference under the provisions of the Code? Immediately prior to filing bankruptcy:
a. debtor sells assets well below fair market price to Freddie, a friend.
b. debtor sells his car at a public auction, thinking that it would bring a decent price, but the
car brings an amount well below fair market value.
c. debtor's corporation transfers assets to stockholders in lieu of cash dividends.
d. debtor pays $650 to "Nation on Line" for the past ten months of Internet service.
Answer: B
24. Agnes plans to file for bankruptcy under Chapter 7. One month prior to filing, Agnes
gives Joe's Filling Station $700 to apply to her gas bill. Joe has been so kind to let her charge
the gas she needed for her car over the past year. The bankruptcy trustee appointed to the
case:
a. can cancel the payment to Joe as a fraudulent transfer.
b. cannot cancel the payment to Joe because it is payment for an existing debt.
c. cannot cancel the payment to Joe because he is not an insider.
d. can cancel the payment to Joe as a voidable preference.
Answer: D
25. Under the federal Bankruptcy Code, the exemption amount for the debtor's personal
residence is:
a. $20,200.
b. $37,100.
c. unlimited.
d. $50,000.
Answer: A
ESSAY
1. Mark and Cynthia work for Bryson Supply Co. If the company files for Chapter 7
bankruptcy before paying their last month of wages and benefits, will they be able to recover
anything from the company?
Answer: One goal of the Bankruptcy Code is to ensure creditors are paid in the proper order.
The Code places all claims into one of three classes: secured claims, priority claims, and
unsecured claims. Secured claims are paid in full before priority claims are paid. Payments to
employees for back wages and benefits for work performed during the 180 days prior to the
filing of bankruptcy are in the class of priority claims. If Bryson has enough assets to pay all
its secured claims and its priority claims, Mark and Cynthia will each be able to recover up to
$10,950 for the work performed and pension, health, or life insurance plans for work
performed during the 180 days prior to the date of Bryson’s petition. There are subcategories
of priority claims, and each subcategory must receive full payment before the next
subcategory receives anything. If there are not enough funds to pay a whole subcategory, the
claimants in that subcategory receive pro rata shares. The priority subcategories, in order,
include: alimony and child support, administrative expenses, gap expenses, payments to
employees, employee benefit plans, consumer deposits for goods to be purchased, taxes, and
claims for injuries caused by a bankrupt driving under the influence.
2. What are the three main purposes of the federal Bankruptcy Code? How are these purposes
supported and fostered in the Code?
Answer: The primary goals of the Bankruptcy Code are: (1) To preserve as much of the
debtor's property as possible. The Code requires full disclosure of the debtor's assets,
liabilities, income, and expenses. Also, under the Code the trustee has the power to set aside
voidable preferences and fraudulent transfers. (2) To divide the debtor's assets fairly between
the debtor and creditors. The bankruptcy forum is a place where all creditors can be gathered
and where everyone plays by the same regulations. The Code attempts to balance the
creditor's desire to be paid with the debtor's right to get on in life with a fresh start. 3) To
divide the debtor's assets fairly among creditors. Creditors will all be treated fairly, according
to established rules.
3. Artistic Framing, a business with $120,000 of unsecured debt, needs to file for bankruptcy,
but wants to continue in business. Discuss what chapter of the Bankruptcy Code should be
used, and discuss the effect of the 2005 amendment to the Code on the proceedings.
Answer: If Artistic wants to continue in business, it should file under a reorganization chapter
(Chapters 11 or 13) rather than a liquidation chapter (Chapter 7). Although its purpose is to
rehabilitate the debtor through reorganization, Chapter 13 is available only to individual
debtors with a regular source of income. It is not available to businesses. Chapter 11 is the
appropriate chapter for Artistic. Artistic becomes the debtor in possession and, in effect,
serves as trustee. A 2005 amendment to the Code includes provisions to speed up the process
of reorganization for businesses with less than $2 million in debt. After the order for relief,
the debtor has the exclusive right to file a plan of reorganization for 180 days. Both a plan
and a disclosure statement must be filed within 300 days. The court must confirm or reject
the plan within 45 days after its filing. If the deadlines are not met, the case can be dismissed
or changed to a Chapter 7 proceeding.
4. When Dudley files his Chapter 7 petition, he lists the following debts:
a. $25,000 in back child support and alimony.
b. $15,000 for liabilities incurred after drinking and driving.
c. $10,000 for past-due student loans.
d. $5,000 for past-due rent to his landlord.
e. $550 for a past-due phone bill.
How will each of these debts be treated by the bankruptcy court.
Answer: Certain debts are never discharged and the debtor is fully liable for the debts even
after receiving a discharge from the bankruptcy court. These types of debts are generally
denied a discharge based on public policy reasons. In this example, the child support and
alimony, the liabilities for operating a motor vehicle while under the influence, and school
loans guaranteed by the government (unless undue hardship can be established) are
nondischargeable debts. Bankruptcy has no effect on these debts. The unpaid rent and phone
bill generally will be discharged.
5. Karen has filed for bankruptcy. Who has the authority to confirm or reject a plan of
payment, and what factors will be considered when deciding whether to approve a repayment
plan under Chapter 13?
Answer: The court has the sole authority to confirm or reject the plan of payment. Creditors
have no voting rights. However, the court will ensure the following:
• the creditors have the opportunity to voice their objections at a hearing.
• all of the unsecured creditors receive at least as much as they would have under a Chapter 7
filing.
• the plan is feasible and the bankrupt will be able to make the promised payments.
• the court must have a good reason to allow a plan to extend beyond three years and in no
event can it last longer than five years.
• the debtor is acting in good faith, making a reasonable effort to pay obligations.
Test Bank For Introduction to Business Law
Jeffrey F. Beatty, Susan S. Samuelson
9781133188155
