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
A1. Bankruptcy law has one goal—to provide relief and protection for creditors who have
“given too much credit.”
A2. Bankruptcy proceedings are held in state courts.
A3. Any “person” may be a debtor in a liquidation proceeding.
A4. To falsify information on official bankruptcy schedules is a crime.
A5. If a debtor’s income is below the median income, there is a presumption of
bankruptcy abuse.
A6. An involuntary bankruptcy occurs when a debtor’s creditors are forced to accept a
discharge of the debtor’s debts.
A7. A bankruptcy estate consists of all the debtor’s interests in property currently held,
wherever located.
A8. The basic duty of a trustee is to collect and reduce to cash the property in the
bankruptcy estate that is not exempt.
A9. In most states, debtors may use only federal exemptions to exempt certain property
from the bankruptcy.
A10. A trustee must call a meeting of the creditors listed in the schedules filed by the
debtor.
A11. In the distribution of the debtor’s estate, secured creditors take priority over
unsecured creditors.
A12. Certain debtors may not qualify to have all debts discharged in bankruptcy.
A13. Discharge of a debt is never denied because of the nature of a claim.
A14. One of the primary effects of a discharge is to relieve the liability of a co-debtor.
A15. The same principles that govern the filing of a liquidation petition apply to
reorganization proceedings.
A16. On the entry of an order for relief in a reorganization case, the creditors generally take
over the operation of the debtor’s business.
A17. For individual debtors, the plan in a reorganization case must be completed before
discharge will be granted.
A18. Certain liquidation cases may be converted to repayment plan cases with the consent
of the debtor.
A19. In a repayment plan case, the plan must provide for payment of all obligations in full.
A20. The procedure for filing a family-farmer bankruptcy plan is very similar to the proce–
dure for filing a repayment plan.
MULTIPLE CHOICE QUESTIONS
A1. Mikhail files a petition in bankruptcy. One of the goals of bankruptcy law with respect
to a debtor who has “gotten in over his head” is to
a. encourage the continued use of credit to borrow funds.
b. ensure that co-debtors will continue to guarantee loans.
c. provide relief and protection.
d. shield assets from creditors.
A2. Bernice files a petition in bankruptcy. The initial proceeding on this petition will be in
a. a federal bankruptcy court.
b. a state bankruptcy court.
c. the highest court in the state in which Bernice is located.
d. the United States Supreme Court.
A3. A petition for a discharge in bankruptcy in a liquidation proceeding may be filed by
a. Eminent Employees Credit Union, a corporation.
b. Federal Savings & Loan Association, a corporation.
c. Goodhands Insurance Company, a corporation.
d. Henry, an independent financial adviser.
A4. Kenyon files a petition for bankruptcy. Kenyon must include with the petition
a. a plan to turn over his future income to the trustee.
b. a certificate proving attendance at a credit-counseling briefing.
c. a provision of adequate means for the petition’s execution.
d a statement of preference for one creditor over another.
A5. Verna files a petition in bankruptcy in a liquidation proceeding. If the court administers the
means test and concludes that Verna is abusing the bankruptcy process by filing for a
liquidation, the court will most likely
a. force Verna to file for relief through an individual repayment plan.
b. discharge Verna’s debts.
c. distribute Verna’s property to Verna’s creditors.
d. issue an automatic stay against any actions by Verna’s creditors.
A6. Mia’s voluntary petition for bankruptcy is found to be proper. The order for relief is
effective as soon as
a. Mia files the petition.
b. Mia posts a bond to cover the costs of the proceedings.
c. Mia’s creditors agree to the terms.
d. the trustee collects and distributes the property of Mia’s estate.
A7. Hasty Pastries declares bankruptcy, idling Hasty’s delivery vehicles. The court can
compel Hasty to make periodic cash payments to a creditor with a secured interest in
the vehicles to offset the depreciation in their value. This is
a. the adequate protection doctrine.
b. the avoidance doctrine.
c. a preferential transfer.
d. the automatic stay.
Fact Pattern 30–1A (Questions A8–A9 apply)
Stacy sells her all-terrain vehicle (ATV) to her brother Terrill for $1,000. Twelve days later,
Stacy files a petition in bankruptcy for relief through a liquidation.
A8. Refer to Fact Pattern 30-1A. Terrill dies while riding the ATV. Stacy is Terrill’s only heir.
With respect to the bankruptcy estate, the inheritance is
a. exempt property.
b. part of the estate if Terrill died more than 180 days after Stacy’s filing.
c. part of the estate if Terrill died within 180 days after Stacy’s filing.
d. part of the estate if the accident was in some way Stacy’s fault.
A9. Refer to Fact Pattern 30-1A. Regarding the sale of the ATV, the trustee may
a. cancel it as a fraudulent transfer.
b. cancel it as a voidable preference.
c. not cancel it because it is a sale, not a gift.
d. not cancel it, but can sue Terrill’s estate for the return of the $1,000.
A10. Lorissa files a petition for bankruptcy. Lorissa’s creditors must file with the court their
proof of claims against Lorissa’s assets within
a. fifteen days of the order for relief.
b. thirty days of the filing of the petition.
c. sixty days of the automatic stay.
d. ninety days of the creditors’ meeting.
A11. Kipper files a petition in bankruptcy. Kipper’s dischargeable debts include
a. domestic-support obligations.
b. student loans unless the lender would suffer undue hardship.
c. unpaid state and federal taxes.
d. unsecured credit-card debt.
A12. Teona files a voluntary petition in bankruptcy for relief through a liquidation. Debts that will
not be discharged include claims for
a. domestic-support obligations.
b. money to be paid for goods not delivered.
c. contributions to employee benefit plans.
d. long overdue credit-card debt.
A13. Ronaldo agrees to pay Simplex Cash Store a debt that is otherwise dischargeable in
bankruptcy. This is
a. a reaffirmation.
b. a liquidation.
c. a reorganization.
d. a petition.
A14. Reconstruction Building Services receives a discharge in bankruptcy, even though
some creditors hold judgments on overdue debts against it and others filed actions to
collect on overdue debts before the bankruptcy. Reconstruction’s discharge will
a. absolve the liability of any co-debtors.
b. permit the debtor to enter into reaffirmation agreements.
c. allow the debtor to file a petition for a reorganization.
d. prohibit actions and void judgments regarding overdue debts.
A15. Swim & Trim Fitness Corporation wants to formulate a plan under which it pays a
portion of its debts and is discharged of the remainder while continuing in business.
To accomplish this goal, Swim & Trim should file a petition in bankruptcy for relief
through
a. a liquidation.
b. a reorganization.
c. a repayment plan.
d. a family-farmer bankruptcy plan.
A16. Resources Exploitation, Inc. (REI), files a petition in bankruptcy for relief through a
reorganization and assumes the role of a debtor in possession. In this role, REI is simi-
lar to
a. a creditor at a creditors’ meeting.
b. a farmer after a discharge through family-farmer bankruptcy plan.
c. a secured creditor in possession of collateral.
d. a trustee in a liquidation.
A17. To adjust debt and institute a repayment plan, Charlie—who is not a corporation, a
partnership, or a family farmer or fisherman—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.
A18. Tippi believes that she needs to obtain a discharge in bankruptcy through an
individual’s repayment plan. This proceeding can be initiated by a filing of a petition
by
a. a creditor.
b. a debtor.
c. a corporation.
d. a partnership.
A19. Wilbur files a petition in bankruptcy for relief through an individual’s repayment plan.
Wilbur is granted a discharge. Debts that will not be discharged include claims for
a. contributions to employee benefit plans.
b. money to be paid for services not rendered.
c. fraudulently incurred debt.
d. long overdue credit-card debt.
A20. To adjust debt and institute a repayment plan, Norman, a family fisherman, may file a
petition in bankruptcy for relief under the Bankruptcy Code’s Chapter
a. 1.
b. 3.
c. 5.
d. 12.
ESSAY QUESTIONS
A1. Current City (CC) is a retail seller of television sets. CC sells Dhani a $5,000 large–
screen, high-definition, plasma set on a retail installment security agreement in which
he pays $100 down and agrees to pay the balance in equal installments. CC retains a
security interest in the set, and perfects that interest by filing a financing statement
centrally. Two months later, Dhani is in default on the payments to CC and is involun-
tarily petitioned into bankruptcy by other creditors. Discuss CC’s right to repossess the
TV set and whether CC has priority over the trustee in bankruptcy to any proceeds
from the disposal of the set.
A2. Job Service, Inc., needs funds to meet its payroll, to make other current operating
expenses, and to pay its creditors. Kelly, Job Service’s only shareholder, loans the
company $10,000 and accepts a promissory note signed on behalf of Job Service by
Luna, the firm’s accountant. Job Service’s financial problems continue, however, and
the firm’s creditors file an involuntary petition to force it into bankruptcy. Is Kelly
entitled to repayment of the loan to Job Service? If so, what is the priority of the
claim?