CHAPTER 40
BANKRUPTCY
Answers to Learning Objective
1. The purposes of bankruptcy are to give the debtor a new start and to give creditors an equal chance
to be paid. Any person or business, except banks, savings and loan associations, insurance
companies, and municipalities, may file for bankruptcy.
Lesson Outline
1. Bankruptcy is a judicial declaration as to a debtor’s financial status. The bankruptcy law has two
definite purposes:
a. To give the debtor a new start
b. To give creditors an equal chance in the collection of their claims
7. There is a special rehabilitation system for businesses so they may be reorganized rather than
liquidated.
8. If the debtor is an individual, a Chapter 13 plan in lieu of liquidation may be worked out.
9. In order to file under Chapter 7, debtors must have “current monthly income” the same as or less
than the median income of similar families.
10. The federal law and every state set forth certain property that is exempt from seizure for the debts of
the debtor. Some property acquired by the debtor after the start of bankruptcy proceedings may be
used for the payment of creditors. The debtor must cooperate fully with the trustee.
Comments on Cases
(p. 483) The court said that even though William and Anna had claimed a separate amount from BAM in
the initial proceeding, the judgment had been an apparently arbitrary amount which bore no
obvious relationship to the separate claims. The separateness of the claims had not been
maintained and reflected in the final judgment. Thus the judgment could not be divided among
its holders. Huszti v Huszti, 451 B.R. 717 (Bankr. E.D. Mich.)
(p. 488) The court stated that Jennings unilaterally determined the amount of the payment, which greatly
exceeded the amount then due, and realized no savings or other benefit as a result of the
payment. His decision to falsify his motives for prepaying $85,000 more than was required was
indicative of his fraudulent intent and concluded that the entire transfer was made with the intent
to prevent the money from reaching his creditors. In re Jennings, 533 F.3d 1333 (11th Cir.)
Answers to Questions
(Page 489)
1. A trustee is appointed in bankruptcy cases to pay each creditor in proportion to a claim to achieve a
more equitable settlement. This arrangement promotes equity, wastes fewer assets, and costs less
money than for each creditor to separately sue the debtor.
5. In order to get their debts excused debtors must complete a 90-minute credit counseling session in
the six months prior to filing and additional counseling on personal financial management after the
bankruptcy case is done.
6. After a Chapter 7 case is filed the creditors must meet and elect a trustee who takes over all the
assets of the debtor.
7. A reorganization proceeding is an alternative to liquidating a business.
8. While under a Chapter 13 plan all debts may not be fully paid but a debtor is fully released from
Chapter 40 Bankruptcy
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Answers to Case Problems
(Page 490)
1. Yes. The court pointed out that once a petition in bankruptcy is filed an automatic stay was
triggered that prevents any creditor from taking any action to exercise control over any property in
the debtor’s estate. TAAS clearly exercised control by refusing the return the truck until ordered to
do so by the court. In re Castillo, 456 B.R. 719 (Bankr. N.D. Georgia)
odds with the policy underlying the Bankruptcy Code. In re Palumbo, 353 B.R. 37 (Mass.)
4. No. The court stated that Letourneau filing an involuntary case against himself was not proper
under any circumstance. An involuntary petition may be filed only by creditors. In re Letourneau,
422 B.R. 132 (N.D. Illinois)
5. No. The court found that by executing the modification agreement, all Kostelnik did was agree to
numerous changes regarding a document to which she never became a party. In addition, even if it
had given ABN an interest in the property, it would be an avoidable preferential transfer. In re
Answers to Summary Cases for Part Eight
(Page 492)
1. Yes. The court said there was no objectively reasonable interpretation of the word “modify” that
would have justified Roberts answering no to the question on the policy application. The court
found it significant that even in Roberts’ testimony he said the truck “had been altered in many
ways.”
2. Yes. Since Beckon had to rent another space for $10,000 a month for two years, the court said the
possession and use of the building clearly had a monetary value to Beckon. The court added that
Beckon also had a financial loss to whatever improvements it had made that were damaged by the
fire and wind storm. The lack of title was immaterial.
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5. No. The court said that although Gene changed the beneficiary contrary to the divorce decree, he
had satisfied the requirement imposed by the decree in such a situation. The decree provided a
remedy for Gene’s violation of the insurance requirement and Gene complied with the decree when
the paid Helga $100 for the month she was not named as a beneficiary on his life insurance.
6. Yes. Since the policy stated the home was the only residence for the named insured or the spouse,
the fact that Charles was still Frances’ spouse and he resided in the home kept the insurance in
force.