25 d - - 8.
a - - MODULE
15. d 27 -BANKRUPTCY
4
2. d - - 9. c - - 16. d
- 17. c
3. d - - 10. d -
MULTIPLE-CHOICE
4. d - - 11. d - - 18. c
5. d - - 12. c - - 19. b
6. c - - 13. d - - 20. b
7. a - - 14. b - - 21. d
MULTIPLE-CHOICE ANSWER EXPLANATIONS
C. Chapter 7 Voluntary Bankruptcy Petitions
1. (d) Voluntary bankruptcy petition is a formal re-
quest by the debtor for an order of relief. This voluntary
bankruptcy petition may be filed jointly by a husband and a
wife. Answer (b) is incorrect because the debtor in a volun-
tary bankruptcy petition need not be insolvent but needs to
state that s/he has debts. Answers (a) and (c) are incorrect
because there is no requirement as to the minimum amount
of the debtor's liabilities in a voluntary proceeding.
2. (d) Under Chapter 7 of the Federal Bankruptcy
Code, a debtor may file a voluntary petition without show-
ing that s/he is insolvent. Slhe merely has to state the exis-
tence of debts. Therefore, the debtor is not required to show
that liabilities exceed the fair market value of assets. An-
swer (a) is incorrect because a corporation may generally
file a voluntary bankruptcy petition and there is not a re-
quirement that it has previously filed under Chapter 11.
Answer (b) is incorrect because when the debtor is auto-
matically given an order for relief upon filing the petition,
the actions to collect money by creditors are stayed. ·Se-
cured creditors will resort to the collateral, however. An-
swer (c) is incorrect because the debtor is voluntarily going
into bankruptcy and there is no requirement that twelve or
more unsecured creditors be owed at least $13,475. Note
that this requirement, as written, does not exist for an invol-
untary bankruptcy petition either.
3. (d) Most debtors may file a voluntary bankruptcy
petition. Among those that may not are insurance compa-
nies, banks, and saving and loan associations. Answer (a) is
incorrect because the number of creditors is not relevant for
a voluntary bankruptcy petition. Answer (b) is incorrect
because there is no need to show that a Chapter 11 bank-
ruptcy would have been unsuccessful. Answer (c) is incor-
rect because the inability of the debtor to pay its debts as
they become due is not relevant to a voluntary bankruptcy.
4. (d) A debtor may file a voluntary bankruptcy peti-
tion without showing that s/he is insolvent. The debtor may
merely state that s/he has debts. There is also no require-
ment as to the number of creditors needed.
D. Chapter 7 Involuntary Bankruptcy Petitions
5. (d) Since there are fewer than twelve creditors, it is
true that only one creditor is needed to file the petition.
However, no one creditor is owed at least $13,475 of unse-
cured debt. Therefore, the claims can be aggregated to total
at least $13,475 of unsecured debt. The only way this can
be accomplished is by aggregating the claims of an four
creditors. Note that Bounty Corporation is not enough be-
cause the secured debt is not counted in the total.
6. (c) When the debtor contests the petition s/he can
still be forced into bankruptcy if the debtor is generally not
- 22. c - - 29. d - -
- - 23. b - - 30. a - -
- - 24.
- - ANSWERS25.
c - - 31. d - -
a - -
- - 26. d - -
- - 27. d - - 1st: -"31 = - %
- - 28. d - - 2nd: _/31 = - %
paying his/her debts as they become due. Answer (a) is
incorrect because the petition may be filed under either
Chapter 7 (straight bankruptcy) or Chapter 11 (business
reorganization). When the bankruptcy is involuntary,
Chapter 7 and Chapter 11 are alternatives and have the same
requirements for filing against business debtors. Answer (b)
is incorrect because although the rules are different when
there are fewer than twelve creditors versus when there are
twelve or more creditors, Dart can be forced into bankruptcy
when Decoy Publications files the petition because Decoy is
owed over $13,475 of unsecured debt. Answer (d) is incor-
rect because there is no exception for the IRS.
7. (a) Once a valid petition in bankruptcy is filed, this
automatically stays other legal proceedings against the
debtor' s estate. Also, the court appoints an interim trustee.
8. (a) The bankruptcy estate contains $100,000 after
the sale of all assets and payment of administration ex-
penses. The secured debt of $70,000 to Fracon Bank and the
secured debt of $2,000 to Decoy Publications are satisfied
first. (This actually takes place as a higher priority over the
administrative expenses.) Therefore, after paying this
$72,000 there is $28,000 left. The $12,000 of unpaid in-
come tax has the next highest priority of those listed. This
-Ieaves $16,000 for the general creditors who filed on time.
There are three of these, that is, Fracon who is owed $5,000
in excess of what the sale of the property brought, JOG who
is owed $3,000, and Decoy who is still owed $14,000 in
excess of the security interest. These three creditors together
are owed $22,000 ($5,000 + $3,000 + $14,000) .. Since this
is more than the $16,000 left, these 3 general creditors' debts
are prorated. The last priority of unsecured claimants who
filed late get nothing. Therefore, Nanstar Electric gets $0.
9. (c) The bankruptcy estate contains $100,000 after
the sale of all assets and payment of administration ex-
penses. The secured debt of $70,000 to Fracon Bank and the
secured debt of $2,000 to Decoy Publications are satisfied
first. (This actually takes place as a higher priority over the
administrative expenses.) Therefore, after paying this
$72,000 there is $28,000 left. The $12,000 of unpaid in-
come tax has the next highest priority of those listed. This
leaves $16,000 for the general creditors who filed on time.
There are three of these, that is, Fracon who is owed $5,000
in excess of what the sale of the property brought, JOG who
is owed $3,000, and Decoy who is still owed $14,000 in
excess of the security interest. These three creditors together
are owed $22,000 ($5,000 + $3,000 + $14,000). Since this
is more than the $16,000 left, these three general creditors'
debts are prorated. Fracon Bank" gets money from both the
unsecured and secured claims. From the unsecured claim,
Fracon receives a prorated share or
$5,000
x $\6,000 = $3,636
$5,000 + $3,000 + $14,000