Chapter 16
Creditor-Debtor Relations
and Bankruptcy
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
1. With a mechanic’s lien, real estate becomes security for a debt.
2. A writ of execution applies to a debtor’s nonexempt real or personal property
wherever located.
3. Only a few types of property—a debtor’s wages or bank account, for
example—can be garnished.
4. Liens generally take priority over other claims against the same property.
5. If a homeowner defaults, or fails to make the mortgage payments, the lender
has the right to foreclose on the mortgaged property.
6. The lender does not have to strictly comply with the state statute governing
foreclosure—substantial compliance is sufficient.
7. A surety can be required to pay an obligation only after the principal debtor
defaults and usually only after the creditor has made an attempt to collect from
the debtor.
8. When a surety or guarantor pays a debt owed to a creditor, he or she acquires
any right that the creditor had against the debtor.
9. A surety is entitled to receive from the debtor the actual amount of the debt
paid to the creditor on behalf of the suretyship arrangement but not other
expenses incurred.
10. Personal property that is most often exempt from satisfaction of judgment debts
does not include equipment that the debtor uses in a business or trade.
11. Rulings from bankruptcy courts are final—they cannot be appealed.
CHAPTER 16: CREDITOR-DEBTOR RELATIONS AND BANKRUPTCY 3
12. The clerk of a bankruptcy court must provide consumer-debtors with
information on the types of services available from credit counseling agencies.
13. The means test forces more people to file for Chapter 7 bankruptcy rather than
gave their debts discharged under Chapter 13.
14. An involuntary bankruptcy occurs when the debtor forces his or her creditors
into bankruptcy proceedings.
15. An individual debtor cannot exempt or exclude any property from the
bankruptcy.
16. When a debtor has no assets, creditors are notified of the debtor’s petition for
bankruptcy but are instructed not to file a claim.
17. In a Chapter 11 case, the court cannot confirm a reorganization plan over the
objections of a class of creditors.
18. Generally, in a Chapter 11 case, no orders affecting the estate will be entered
without the consent of the creditors’ committee or after a hearing in which the
judge is informed of the committee’s position
4 TEST BANK—UNIT THREE: THE COMMERCIAL ENVIRONMENT
19. If the circumstances indicate bad faith, a court can dismiss a debtors’ Chapter
13 petition.
20. In putting together a repayment plan under Chapter 13, a debtor must apply the
means test to identify the amount of disposable income that will be available to
repay creditors.
MULTIPLE CHOICE QUESTIONS
1. Portia owes Bon $500 on their roof repair contract, but refuses to pay. To
collect, Bon files a mechanic’s lien. Under a mechanic’s lien, security for the
debt is represented by
a. Portia’s personal property.
b. Portia’s real estate.
c. the $500 owed under the contract.
d. the contract.
2. Refer to Fact Pattern 29-1B. If Michael imposes a lien on Jill’s car, it will end
a. in thirty days.
b. in sixty days.
c. when Michael voluntarily surrenders possession of the car.
d. when Jill obtains a court order requiring Michael to return the car.
3. A court awards a judgment to Loan Collection Agency, who is the creditor,
against Margret, who is the debtor. After the judgment, the creditor requests a
court order to seize Margret’s property to ensure that the judgment will be
collectible. This is
a. a judicial lien.
b. a writ of attachment.
c. a writ of execution.
d. a violation of most state laws.
4. Ronaldo’s debt to Sofia is past due. Ronaldo obtains a judgment against Sofia
to collect the debt, but Sofia will not pay. Ronaldo requests a writ of execution.
The property that is seized under the writ of execution must be
a. in Ronaldo’s possession.
b. in Sofia’s possession.
c. in the possession of Sofia’s employer or other third party.
d. located within the court’s geographic jurisdiction.
5. George borrows funds from Hometown Credit Union (HCU) to buy real
property. George signs a written instrument that gives HCU an interest in the
property as security for the debt’s payment. This is
a. a mortgage.
b. an artisan’s lien.
c. a workout agreement.
d. a suretyship arrangement.
6. Ridgeline Bank provides Shirley with a mortgage to buy a home. The rate of
interest is fixed for three years and then adjusts annually. This is
a. a fixed-rate mortgage.
b. an adjustable-rate mortgage.
c. a creditor’s composition agreement.
d. a guaranty agreement.
7. Erin and Dooley, a married couple, borrow $120,000 from Capital & Credit
Bank to buy a home. When Erin and Dooley divorce, they are unable to make
payments on the mortgage. The market value of the home has declined to less
than the balance of the loan. Capital & Credit agrees to a sale of the property
for this amount. This is
a. a prepayment penalty.
b. forbearance.
c. foreclosure.
d. a short sale.
8. Vito borrows $110,000 from Watershed Bank to buy a home. If he fails to make
payments on the mortgage, the bank has the right to repossess and auction off
the property securing the loan. This is
a. a short sale.
b. forbearance.
c. foreclosure.
d. the right of redemption.
9. Gena borrows $350,000 from Fish Island Bank to buy a home, which secures
the mortgage. In the seventh year of the loan, Gena stops making payments.
After the bank repossesses the property but before it is sold, Gena may buy it
by paying
a. an amount that equals the potential proceeds from the property’s sale.
b an amount that exceeds the potential proceeds from the property’s sale.
c. the amount of the missed payments, but not more.
d. the full amount of the debt, plus any interest and costs.
10. Dina asks Edie to co-sign a credit application so that she can borrow money
and buy a piano from First Chair, a musical instruments and supplies seller. If,
after the loan agreement is signed, Dina agrees to a higher rate of interest
without telling Edie, then Edie is
a. discharged from the agreement.
b. liable at the higher rate of interest.
c. liable at the lower rate of interest.
d. liable for the principal only.
11. Jordan is a surety for Kelly’s loan from Lenders Credit Corporation. When the
loan comes due, Kelly tries to pay Lenders Credit, but the creditor rejects the
payment. Jordan is
a. released from any obligation on the debt.
b. required to pay the amount of the debt to Lenders Credit.
c. required to pay up to half of the amount of the debt to Lenders Credit.
d. required to pay the amount of the debt to Kelly.
12. Beatrix defaults on a debt to Credit Loan Corporation (CLC). As a creditor, CLC
can place liens on all of Beatrix’s property except
a. motor vehicles used to commute to work.
b. stock in various corporations.
c. items that the debtor selects.
d. vacant commercial property.
13. Nancy joins with other creditors to force Odette, a debtor, into bankruptcy. One
of the goals of bankruptcy law with respect to creditors is to
a. provide that creditors will continue to lend to insolvent debtors.
b. protect creditor assets from diminution in value.
c. ensure equitable treatment of creditors who are competing for a debtor’s
assets.
d. make all debtor property available for creditors.
14. Bess wishes to appeal a decision of a bankruptcy court. Bess may appeal to
a. no court—there is no appeal from a bankruptcy court decision.
b. a federal district court.
c. the U.S. Supreme Court.
d. a state court.
15. Roland files a petition in bankruptcy. After all his assets have been sold and the
proceeds distributed among his creditors, Roland’s remaining debts
a. are discharged.
b. will be paid by the court.
c. must be paid by Roland.
d. are put on hold until Roland has sufficient means to pay them.
16. Gerald files a petition in bankruptcy. An automatic stay will apply to actions by
creditors seeking to collect Gerald’s debts comprised of
a. alimony.
b. child-support.
c. none of the choices.
d. car payments.
17. Norma files a petition in bankruptcy. She turns her assets over to O’Brien, who
sells them and then distributes the proceeds to Norma’s creditors. O’Brien is a
a. preferred creditor.
b. bankruptcy court judge.
c. bankruptcy trustee.
d. debtor.
18. Leif files a petition in bankruptcy. Among his debts are unpaid taxes, fines
owed to the government, student loans owed to Metro University, and support
owed to his ex-wife Nadia. Most likely to be discharged are
a. back taxes accrued within the previous three years.
b. fines outstanding less than eight years.
c. student loans whose payment would impose undue hardship.
d. spousal-support debts unpaid for more than eighteen months.
19. Eduardo is a debtor. Furniture Mart is Eduardo’s employer. Guaranty Credit,
Inc., and the government are Eduardo’s creditors. For these parties, a petition
in bankruptcy for relief through an individual’s repayment plan could be filed by
a. Eduardo alone, Furniture Mart alone, or Guaranty Credit and the
government jointly.
b. Eduardo only.
c. Guaranty Credit and the government only.
d. the government only.
20. Dorothy files a petition for bankruptcy in bankruptcy for relief through an
individual’s repayment plan. If she is granted a discharge, debts that will most
likely be discharged include
a. claims not provided for by the plan.
b. payments on retirement accounts.
c. claims for domestic support obligations.
d. credit-card debt incurred more than one year before filing.
CHAPTER 16: CREDITOR-DEBTOR RELATIONS AND BANKRUPTCY 11
ESSAY QUESTIONS
1. The roof in Rosalyn’s house springs a leak. She contracts with Shelter Roofing
& Restoration Company to repair the roof and fix the damage to the house.
Rosalyn pays 10 percent of the price in advance. Shelter Roofing does the
work, but Rosalyn refuses to pay the rest of the price. What can Shelter
Roofing do, and how is it done?
2. Rashi is a student at State University. In need of funds to pay for tuition and
books, Rashi asks Tiempo Loans, Inc., for a short-term loan. The lender agrees
to make a loan if Rashi will have someone who is financially responsible
guarantee the loan payments. Umberto, a well-known businessperson and a
friend of Rashi’s family, calls Tiempo and agrees to pay the loan if Rashi
cannot. Because of Umberto’s reputation, the loan is made. Rashi is making
the payments, but because of illness he is unable to work for one month. He
asks Tiempo to extend the loan for three months. The lender agrees, raising
the interest rate for the extended period. Umberto is not notified of the
extension (and thus does not consent to it). One month later, Rashi drops out
of school. All attempts to collect the remainder of the loan from Rashi fail. Can
Tiempo assert a claim against Umberto on the debt?
