CHAPTER 22: BANKRUPTCY LAW 27
whole or in part.
whole or in part.
30 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
home). She decides to file for Chapter 7 bankruptcy, hoping for a fresh start. Ask your students to answer the
following questions, using the information presented in the chapter.
1. What must Janet do before filing a petition for relief under Chapter 7? Under the 2005 bankruptcy
reform, all debtors must receive credit counseling from an approved nonprofit agency within the 180-day
period preceding the date of filing a petition in bankruptcy. Therefore, before Janet can file her petition, she
needs to attend either an individual or group briefing from an approved credit-counseling agency..
2. How much time does Janet have after filing the bankruptcy petition to submit the required
schedules? What happens if Janet does not meet the deadline? Janet must file the required schedules
within 45 days after filing her petition—unless she gets an extension of up to 45 days. If she does not meet
the deadline, then her case is automatically dismissed.
3. Assume that Janet files a petition under Chapter 7. Further assume that the median family income
in the state in which Janet lives is $49,300. What steps would a court take to determine whether
Janet’s petition is presumed to be “substantial abuse” under the means test? To determine whether
Janet’s petition is presumed to be “substantial abuse,” the court would calculate Janet’s average monthly
income for recent months (less certain allowed expenses). If Janet’s income exceeds the state’s median
family income, further calculations are made to determine whether she has sufficient disposable income to
repay at least some of her unsecured debts. If her yearly disposable income is greater than $2,200 or her
monthly disposable income over five years exceeds 25 percent of her unsecured debts, then abuse is
presumed.
4. Suppose that the court determines that no presumption of substantial abuse applies in Janet’s
case. Nevertheless, the court finds that Janet does have the ability to pay a portion of the amount due
on the medical bills out of her disposable income. What would the court likely order in that situation?
If a court found that Janet had an ability to pay a portion of her deceased husband’s medical bills, a court
would convert her bankruptcy case to a Chapter 13, individual repayment plan.
DEBATE THIS
Rather than being allowed to file Chapter 7 bankruptcy petitions, individuals and couples should
always be forced to make an effort to pay off their debts through Chapter 13. Every time consumers
deprive creditors of repayment by successfully obtaining Chapter 7 protection, the creditors’ costs rise.
Consequently, all business that extend credit must raise the interest rates they charge to all borrowers to
cover these increased costs. Therefore, allowing consumers to simply walk away from bone fide debts
imposes extra burdens on all other borrowers.
Not all borrowers default on their debt repayments just because they borrowed “too” much. Sometimes,
unplanned events occur, such as illness, infirmity, and protracted unemployment. It would not only be unfair,
but unrealistic to think that everyone could repay even part of what was owned through use of a Chapter 13
plan. No one wants Chapter 7 to be abused, but means testing at least partially takes care of the problem of
abuse in filing Chapter 7 plans.
CHAPTER 22: BANKRUPTCY LAW 31
whole or in part.
EXAMPREP—
ISSUE SPOTTERS
1. After graduating from college, Tina works briefly as a salesperson before filing for bankruptcy. As
part of her petition, Tina reveals her only debts are student loans, taxes accruing within the last year,
and a claim against her based on her misuse of customers’ funds during her employment. Are these
debts dischargeable in bankruptcy? Explain. No. Besides the claims listed in this problem, the debts that
cannot be discharged in bankruptcy include amounts borrowed to pay back taxes, goods obtained by fraud,
debts that were not listed in the petition, domestic support obligations, certain cash advances, and others.
2. Ogden is a vice president of Plumbing Service, Inc. (PSI). On May 1, Ogden loans PSI $10,000. On
June 1, the firm repays the loan. On July 1, PSI files for bankruptcy. Quentin is appointed trustee. Can
Quentin recover the $10,000 paid to Ogden on June 1? Why or why not? Yes. A debtor’s payment to a
creditor made for a preexisting debt, within ninety days (one year in the case of an insider or fraud) of a
bankruptcy filing, can be recovered if it gives the creditor more than he or she would have received in the
bankruptcy proceedings. A trustee can recover this preference using his or her specific avoidance powers.
whole or in part.
30 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
home). She decides to file for Chapter 7 bankruptcy, hoping for a fresh start. Ask your students to answer the
following questions, using the information presented in the chapter.
1. What must Janet do before filing a petition for relief under Chapter 7? Under the 2005 bankruptcy
reform, all debtors must receive credit counseling from an approved nonprofit agency within the 180-day
period preceding the date of filing a petition in bankruptcy. Therefore, before Janet can file her petition, she
needs to attend either an individual or group briefing from an approved credit-counseling agency..
2. How much time does Janet have after filing the bankruptcy petition to submit the required
schedules? What happens if Janet does not meet the deadline? Janet must file the required schedules
within 45 days after filing her petition—unless she gets an extension of up to 45 days. If she does not meet
the deadline, then her case is automatically dismissed.
3. Assume that Janet files a petition under Chapter 7. Further assume that the median family income
in the state in which Janet lives is $49,300. What steps would a court take to determine whether
Janet’s petition is presumed to be “substantial abuse” under the means test? To determine whether
Janet’s petition is presumed to be “substantial abuse,” the court would calculate Janet’s average monthly
income for recent months (less certain allowed expenses). If Janet’s income exceeds the state’s median
family income, further calculations are made to determine whether she has sufficient disposable income to
repay at least some of her unsecured debts. If her yearly disposable income is greater than $2,200 or her
monthly disposable income over five years exceeds 25 percent of her unsecured debts, then abuse is
presumed.
4. Suppose that the court determines that no presumption of substantial abuse applies in Janet’s
case. Nevertheless, the court finds that Janet does have the ability to pay a portion of the amount due
on the medical bills out of her disposable income. What would the court likely order in that situation?
If a court found that Janet had an ability to pay a portion of her deceased husband’s medical bills, a court
would convert her bankruptcy case to a Chapter 13, individual repayment plan.
DEBATE THIS
Rather than being allowed to file Chapter 7 bankruptcy petitions, individuals and couples should
always be forced to make an effort to pay off their debts through Chapter 13. Every time consumers
deprive creditors of repayment by successfully obtaining Chapter 7 protection, the creditors’ costs rise.
Consequently, all business that extend credit must raise the interest rates they charge to all borrowers to
cover these increased costs. Therefore, allowing consumers to simply walk away from bone fide debts
imposes extra burdens on all other borrowers.
Not all borrowers default on their debt repayments just because they borrowed “too” much. Sometimes,
unplanned events occur, such as illness, infirmity, and protracted unemployment. It would not only be unfair,
but unrealistic to think that everyone could repay even part of what was owned through use of a Chapter 13
plan. No one wants Chapter 7 to be abused, but means testing at least partially takes care of the problem of
abuse in filing Chapter 7 plans.
CHAPTER 22: BANKRUPTCY LAW 31
whole or in part.
EXAMPREP—
ISSUE SPOTTERS
1. After graduating from college, Tina works briefly as a salesperson before filing for bankruptcy. As
part of her petition, Tina reveals her only debts are student loans, taxes accruing within the last year,
and a claim against her based on her misuse of customers’ funds during her employment. Are these
debts dischargeable in bankruptcy? Explain. No. Besides the claims listed in this problem, the debts that
cannot be discharged in bankruptcy include amounts borrowed to pay back taxes, goods obtained by fraud,
debts that were not listed in the petition, domestic support obligations, certain cash advances, and others.
2. Ogden is a vice president of Plumbing Service, Inc. (PSI). On May 1, Ogden loans PSI $10,000. On
June 1, the firm repays the loan. On July 1, PSI files for bankruptcy. Quentin is appointed trustee. Can
Quentin recover the $10,000 paid to Ogden on June 1? Why or why not? Yes. A debtor’s payment to a
creditor made for a preexisting debt, within ninety days (one year in the case of an insider or fraud) of a
bankruptcy filing, can be recovered if it gives the creditor more than he or she would have received in the
bankruptcy proceedings. A trustee can recover this preference using his or her specific avoidance powers.