ANSWER KEY
Chapter 21 Bankruptcy and Debt Adjustment
Opening Case Questions
3. Hanover offers two reasons for the unconstitutionality of the federal bankruptcy law: (1) The law
5. The Court addresses the Fifth Amendment argument first, because that argument is aimed at the
more fundamental of the two issues. Under the Fifth Amendment, the plaintiff claims that the
bankruptcy law is unconstitutional because, under its provisions, the process of distributing the debtor’s
property can be completed without notifying all those parties that have an interest in the property,
Hanover being one such party. More specifically, Hanover claims that the Due Process Clause has been
A QUESTION OF ETHICS
1. Special Directions to the Instructor: Determining in advance the answers that learners will
provide for this ethical question is be very challenging, especially since the learners are required to use
both rational ethics and utilitarianism. On the other hand, with the possible exception of market value
Self-Evident Questions
2. Whether financial institutions should be forced into bankruptcy by the government (or allowed to
3. Only a few changes in the bankruptcy law would have to take place to implement the plan
outlined above. Basically, the best thing that could be done would be to make it easier for those
4. Creditors of a financial institution would prefer the bankruptcy solution. At least with a
bankruptcy decision in the courts, the creditors would be guaranteed their piece of the financial pie. In
Questions for Review and Discussion
1. Early bankruptcy laws always favored creditors. In addition to losing all of
their property, debtors were often put in debtors’ prison and sometimes, though
not in the United States, put to death. The !rst federal bankruptcy law in the
United States was enacted in 1800. Under that law, only creditors could begin a
bankruptcy proceeding, and only merchants could qualify as debtors. That law
lasted only three years before Congress repealed it. In 1840, debtors’ prisons
were abolished in the United States, and a year later, Congress passed a
bankruptcy law that lasted only two years. Following the turmoil of the Civil War,
Congress enacted a third bankruptcy law in 1867 that lasted eleven years. It
wasn’t until 1898 that permanent bankruptcy legislation came about in the United
States, with a law that gave businesses protection from creditors and lasted, with
2. The text explains the relationship between federal bankruptcy law and state bankruptcy law in
the following way: “The courts were openly in favor of a universally applied bankruptcy statute that
would unify the operation from state to state. However, being sympathetic to the concept of a universal
federal bankruptcy law is not the same as mandating that Congress pass such an act, nor justification
for declaring an inconsistent non-universal law as unconstitutional. Instead, the courts have held that, in
the absence of any federal law covering bankruptcy, the states are free to enact their own bankruptcy
laws. Moreover, since the time of Hanover National City Bank v. Moyses, the U.S. Supreme Court has
also settled on several guidelines regarding this matter. First, the Court has ruled that once Congress
3. To qualify, debtors must: (a) Satisfy the means test; (b) meet with an approved nonprofit credit
4. The means test is made up of three steps, passing any one of which allows the debtor to file for
Chapter 7 bankruptcy. The first step is to compare the debtor’s average income over the previous six
months with the median income for a family of that size in the debtor’s state. If the debtor’s income is
less than the state’s median income, the debtor is eligible to file for Chapter 7 bankruptcy. Step two
requires debtors to determine whether they have enough income to pay off some of their unsecured
debts. This is done by subtracting certain deductions, which vary according to where they live, and
arriving at a figure called disposable income. If their disposable income is less than $110 a month
5. To institute a voluntary bankruptcy proceeding a debtor would go to the nearest federal district
court and file a bankruptcy petition. The debtor would then fill in a form that asks him or her to name
all creditors and to indicate how much money is owed to each. The form also requires a listing of the
debtor’s property, a statement of income and expenses, and an identification of exempt property.
6. After a petition for bankruptcy is filed, the automatic stay goes into effect. This means that the
debtor’s creditors can make no further move to collect debts or file a lawsuit against the debtor. The
7. A debtor’s possible exemptions under Bankruptcy Code provisions fall into three categories:
8. Once a debtor’s property has been sold and reduced to cash, creditors are paid off in the following
order: secured creditors; support obligations owed to a spouse or child; expenses of administering the
bankruptcy process; unsecured debts incurred after the petition was filed but before the relief order was
issued; wages and employee benefit plans; workers in the fishing and farming industries; certain
deposits and advances; taxes; certain unsecured claims; claims for death or injury caused by
9. Chapter 11 bankruptcy allows debtors to free themselves from a devastating financial situation
without having to sell most of their property. Instead, debtors draw up a reorganization plan to alter
repayment schedules. A reorganization plan under Chapter 11 must be approved by one-half of the
10. Only family farming or fishing businesses may file for Chapter 12 bankruptcy. To be eligible, the
operation must receive 50 percent of its total income from farming or fishing. Also, 50 percent of a
farmer’s debt must result from farm expenses, and 80 percent of a fishing business’s debt must relate to
either farming or fishing. Chapter 12 is voluntary—only the debtor may file a petition for this type of
bankruptcy. Chapter 13 of the Bankruptcy Code permits an individual debtor to put in place a
repayment plan. Upon completion of payments under the plan, they receive a discharge from most
Cases for Analysis
1. The U.S. Supreme Court rejected Marrama’s argument that he had an absolute right to convert to
Chapter 13 under the Bankruptcy Code, which provides that a Chapter 7 debtor “may convert a case”
so long as it has not been converted previously. The High Court held that a bankruptcy court has the
2. A personal bankruptcy filing remains on a debtor’s credit report for ten years and has a detrimental
effect on the ability to establish a line of credit. However, most debtors who file bankruptcy have
already established a poor credit rating anyway, and filing bankruptcy gives them an opportunity to
begin anew. A good number of their debts become discharged, which improves their debt-to-income
4. No. Since the California case violated the Florida court’s twelve-month prohibition against further
5. No. Landrin’s debt to the bank is not discharged by the bankruptcy petition because her conduct
6. No. The issue before the court was not whether the debtor could pay the bills as they came due. The
7. Yes. Automatic suspension prohibits creditors from attempting to collect any money owed by the
debtor. The provision extends to actions brought against the debtor by creditors in a court other than the
8. No. The court looked first for a definition of item. Since it was not defined in the Bankruptcy
Code, the court turned to Webster’s Third New International Dictionary, which defined item as “an
individual thing (as an article of household goods, an article of apparel, an object in an art collection, a
10. Yes. The Bankruptcy Code only requires that the plan be feasible, which means that it must have a
good chance of success. The code does not require an absolute guarantee of success. A plan may be
END CHAPTER TWENTY-ONE