Chapter 30
Bankruptcy Law
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
B1. Bankruptcy relief is provided under state law.
B2. Bankruptcy law has one goal—to encourage the continued use of credit.
B3. Bankruptcy proceedings are held in federal bankruptcy courts.
B4. Before filing a petition bankruptcy, debtors must receive credit counseling from an
approved non-profit agency.
B5. A debtor need not be insolvent to file for bankruptcy relief.
B6. A debtor wishing to file for bankruptcy must complete the means test to determine
whether he or she qualifies.
B7. An involuntary bankruptcy occurs when the debtor’s credit does not cover all of his or
her debts.
B8. The adequate protection doctrine protects secured creditors from losing their security
as a result of the automatic stay.
B9. An individual debtor is allowed to exempt certain property from the bankruptcy.
B10. Any creditor listed in the schedules filed by the debtor must file a proof of claim.
B11. In the distribution of the debtor’s estate, unsecured creditors take priority over
secured creditors.
B12. Certain debts are not dischargeable in bankruptcy.
B13. A bankruptcy court may deny a discharge based on the debtor’s conduct.
B14. An agreement to pay a debt discharged in bankruptcy is called a workout.
B15. A court, after notice and a hearing, may dismiss a case under reorganization “for
cause.”
B16. A reorganization plain is a plan to conserve and administer the debtor’s assets in the
hope that all of the creditors will eventually be paid in full.
B17. Certain reorganization cases may be converted to repayment plan cases with the
consent of the debtor.
B18. An individual’s repayment plan under Chapter 13 can be initiated only by the debtor’s
filing of a voluntary petition.
B19. In a repayment plan case, after the debtor has completed all payments, the court
grants a discharge of all debts provided for by the plan.
B20. The content of a family-fisherman bankruptcy plan is basically the same as that of a
repayment plan.
MULTIPLE CHOICE QUESTIONS
B1. Delilah files a petition in bankruptcy. The proceeding is governed by the Bankruptcy
Code, which is part of
a. state law.
b. federal law.
c. the U.S. Constitution.
d. international law.
B2. Lulu joins with other creditors to force McCoy, 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 a fair means of distributing a debtor’s assets.
d. make all debtor property available for creditors.
B3. Nikita operates a sole proprietorship, a corporation, and a partnership. Nikita wants to
obtain relief for her individual debts and the debts of her corporation and partnership.
For each of these, Nikita may file a petition in bankruptcy for relief through
a. a liquidation.
b. a reorganization.
c. a repayment plan.
d. a family-farmer bankruptcy plan.
B4. Seth files a petition for bankruptcy. Seth must include with the petition
a. proof of each creditor’s claim.
b. a list of creditors and the amount of the debt owed to each.
c. all of his debit and credit cards to be disposed of by the court.
d an affidavit testifying to his having read the Bankruptcy Code.
B5. Elise goes through an involuntary bankruptcy proceeding. An involuntary bankruptcy
occurs when
a. creditors are forced to accept a discharge of a debtor’s debts.
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.
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.
B7. Elle is a trustee for a federal bankruptcy court. Elle’s duties include
a. collecting the property in a bankruptcy estate.
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.
B8. 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.
Fact Pattern 30-1B (Questions B9-B10 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 a petition in bankruptcy
for relief through a liquidation.
B9. 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.
B10. Refer to Fact Pattern 30-1B. The highest priority with respect to payment of claims
belongs to
a. Kay and Music, Inc.
b. Jazz Dance Studio.
c. Lora.
d. unnamed general creditors.
B11. 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.
B12. Gem Jewelers files a voluntary petition for bankruptcy. In listing its assets, Gem in-
tentionally omits certain valuable stones. After Gem is granted a discharge, Hor
d’Ouerve Catering, one of Gem’s unsecured creditors whose claims were discharged,
learns of the fraud. Hor d’Ouerve 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.
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.
B14. Eli agrees to pay a debt to Financial Credit, Inc., which is otherwise dischargeable in
bankruptcy. This is
a. a cram-down.
b. a revocation.
c. a reaffirmation.
d. a workout.
B15. Nano Games Corporation’s creditors agree to a workout with the firm. This is
a. an agreement to pay a debt dischargeable in bankruptcy.
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.
B16. Checkerboard Pizza, Inc. (CPI), files a petition in bankruptcy for relief through a
reorganization. CPI’s reorganization plan must contain
a. a plan to turn over its future income to the trustee.
b. a certificate proving attendance at a credit-counseling briefing.
c. a provision of adequate means for the plan’s execution.
d a statement of preference for one creditor over another.
B17. To adjust debts and institute a repayment plan that is less expensive and less
complicated than other options, Brunch & Lunch Café, a small business, may file a
petition in bankruptcy for relief through
a. a liquidation.
b. a reorganization.
c. a repayment plan.
d. a family-farmer bankruptcy plan.
B18. Petunia is a debtor. Her employer Quantum Investments, Inc., her ex-husband Rob,
her alma mater State University, and Timely Credit Company are her creditors. For
these parties, a petition in bankruptcy for relief through an individual’s repayment
plan could be filed by
a. Petunia only.
b. Petunia, her employer, or her creditors only.
c. Petunia or her creditors only.
d. Petunia’s employer only.
B19. Zeke files a petition in bankruptcy for relief through an individual’s repayment plan. Zeke’s
plan must provide for
a. the turnover of his future income to the trustee.
b. his attendance at a credit-counseling briefing.
c. adequate means for the petition’s execution.
d a preference for one creditor over another.
B20. To adjust debt and institute a repayment plan, Naomi, a family farmer, may file a
petition in bankruptcy for relief under the Bankruptcy Code’s Chapter
a. 1.
b. 3.
c. 5.
d. 12.
ESSAY QUESTIONS
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 petition
in bankruptcy for relief in a liquidation proceeding. If the petition is granted, in what
order will RESC’s creditors be paid?
B2. First State Bank is a secured party on a $5,000 loan to Geoff, who owns Happy Hours,
a nightclub. When Geoff experiences financial difficulty, creditors other than First
State Bank petition him into involuntary bankruptcy. The value of the secured
collateral has substantially decreased in value. On its sale, the debt to First State Bank
is reduced to $2,500. Geoff’s estate consists of $100,000 in exempt assets and $2,000
in nonexempt assets. After the bankruptcy costs and back wages to Geoff’s employees
are paid, nothing is left for unsecured creditors. Geoff receives a discharge in
bankruptcy. Later he decides to go back into business. By selling a few exempt assets
and getting a small loan, he is able to buy the Idle Inn, a small, but profitable,
restaurant. Geoff goes to First State Bank for the loan. The bank claims that the
balance of its secured debt was not discharged in Geoff’s bankruptcy. He signs an
agreement to pay First State Bank the $2,500, and the bank makes a new unsecured
loan to him. Is First State Bank correct that the balance of its secured debt was not
discharged in bankruptcy? What is the legal effect of Geoff’s agreement to pay the
bank $2,500 after the discharge in bankruptcy?
