1
Chapter 31
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. The right to petition for bankruptcy relief under federal law is an essential
aspect of our capitalistic society.
B2. Bankruptcy law attempts to balance the rights of the debtors and the creditors.
B3. Rulings from bankruptcy courts are final—they cannot be appealed.
B4. A debtor must be insolvent to file for bankruptcy relief.
B5. The clerk of a bankruptcy court must provide consumer-debtors with
information on the types of services available from credit counseling agencies.
2 TEST BANK B—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
B6. The means test forces more people to file for Chapter 7 bankruptcy rather than
gave their debts discharged under Chapter 13.
B7. An involuntary bankruptcy occurs when the debtor forces his or her creditors
into bankruptcy proceedings.
B8. Exceptions to the automatic stay include investigations by a securities
regulatory agency, which can continue despite the suspension of other actions
against a debtor the moment a bankruptcy petition is filed.
B9. An individual debtor cannot exempt or exclude any property from the
bankruptcy.
B10. When a debtor has not assets, creditors are notified of the debtor’s petition for
bankruptcy but are instructed not to file a claim.
B11. In the distribution of the debtor’s estate, secured creditors take priority over
unsecured creditors.
B12. All debts are dischargeable in bankruptcy.
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B13. A bankruptcy court may deny a discharge based on the debtor’s conduct.
B14. The type of bankruptcy proceeding most commonly used by corporate debtors
is the Chapter 11 reaffirmation.
B15. 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
B16. In a Chapter 11 case, the court cannot confirm a reorganization plan over the
objections of a class of creditors.
B17. If the circumstances indicate bad faith, a court can dismiss a debtors’ Chapter
13 petition.
B18. 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.
B19. In a Chapter 13 case, after the debtor has completed all payments, the court
grants a discharge of all debts provided for by the repayment plan.
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B20. The content of a family-fisherman bankruptcy plan is very different from that of
a repayment plan.
MULTIPLE CHOICE QUESTIONS
B1. 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.
B2. 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.
B3. Paulina operates a sole proprietorship, a corporation, and a partnership.
Paulina wants to obtain relief for her individual debts and the debts of her
corporation and partnership. For each of these, Paulina 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.
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B4. Tully files a petition for bankruptcy. Tully 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. 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.
B6. 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.
B7. Felicia 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.
B8. Patsy files a petition in bankruptcy. At the moment of filing
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a. an automatic stay goes into effect.
b. Patsy’s debts are discharged.
c. Patsy’s petition is dismissed.
d. Patsy’s property is distributed to her creditors.
B9. Daniel is a trustee for a federal bankruptcy court. Daniel’s duties include
a. collecting the debtor’s available 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.
B10. 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.
B11. Thirty-one days before filing a petition in bankruptcy, Gavin transfers property
and makes payments that favor one creditor over another. These are
a. affirmation agreements.
b. preferences.
c. secured interests.
d. unsecured debts.
B12. Builders Construction files a voluntary petition for bankruptcy. In listing its as–
sets, Builders intentionally omits certain assets, including plots of undeveloped
real estate. After Builders is granted a discharge, Commercial Electric
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Company, one of Builders’ unsecured creditors whose claims were discharged,
learns of the fraud. Commercial Electric can
a. do nothing.
b. enforce its claim against Builders.
c. file an involuntary petition for bankruptcy against Builders.
d. take possession of the stones with or without a breach of the peace.
B13. Sheryl files a petition in bankruptcy. Sheryl’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. 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.
B15. Fruit & Flowers Mail Order 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 private, negotiated adjustment of creditor-debtor relations.
d. a reorganization of corporate debts and debtors.
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B16. Luxuro Furniture & Floors, Inc., files a petition in bankruptcy for relief through
reorganization. Luxuro’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, Buffalo n’ Beef Bar-B-Q Restaurant, 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. 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.
B19. Chi-Lan files a petition in bankruptcy for relief through an individual’s repayment
plan. Chi-Lan’s plan must provide for
a. the turnover of her future income to the trustee.
b. her attendance at a credit-counseling briefing.
c. adequate means for the petition’s execution.
d a preference for one creditor over another.
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B20. 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.
ESSAY QUESTIONS
B1. Best Yogurt Corporation orders refrigeration equipment from Cold Storage,
Inc., which has an unperfected security interest in the equipment until it is paid
for. Meanwhile, Best Yogurt takes out a loan from Dependable Credit, Inc.,
subject to a security interest in Best Yogurt’s building and equipment, which
Dependable Credit perfects. Best Yogurt files a petition in bankruptcy for relief
in a liquidation proceeding. If the petition is granted, in what order will the
creditors be paid?
B2. Federal Bank is a secured party on a $50,000 loan to Gigi, who owns Home
HealthCare, an assisted living facility. When Gigi experiences financial
difficulty, creditors other than Federal Bank petition her into involuntary
bankruptcy. The value of the secured collateral has substantially decreased in
value. On its sale, the debt to Federal Bank is reduced to $25,000. Gigi’s estate
consists of $100,000 in exempt assets and $20,000 in nonexempt assets. After
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the bankruptcy costs and back wages to Gigi’s employees are paid, nothing is
left for unsecured creditors. Gigi receives a discharge in bankruptcy. Later she
decides to go back into business. By selling a few exempt assets and getting a
small loan, she is able to buy Indulgence, a small, profitable nightclub. Gigi
goes to Federal Bank for the loan. The bank claims that the balance of its
secured debt was not discharged in Gigi’s bankruptcy. She signs an agreement
to pay Federal Bank the $25,000, and the bank makes a new unsecured loan
to her. Is Federal Bank correct that the balance of its secured debt was not
discharged in bankruptcy? What is the legal effect of Gigi’s agreement to pay
the bank $25,000 after the discharge in bankruptcy?