Deck 15: Creditor Debtor Relations and Bankruptcy

Question 1

The purpose of a homestead exemption is to ensure that a debtor will retain some form of shelter.

Answer 1

True

Question 2

Every state allows a defaulting borrower to redeem the property before the foreclosure sale.

Answer 2

True

Question 3

Because a writ of attachment is a prejudgment remedy, a debtor does not need to be given notice and an opportunity to be heard before the property is seized.

Answer 3

False

Question 4

Once a bankruptcy petition is properly filed, creditors can commence or continue most legal actions against the debtor to recover claims.

Question 5

A small-amount mechanic's lien typically stays on record until the property against which it has been filed is sold when it is paid out of the sale proceeds.

Question 6

To qualify for a Chapter 7 bankruptcy, a debtor must complete a means test to determine whether the debtor has been living within his or her means.

Question 7

Any payment of the principal obligation by the debtor will discharge the surety or the guarantor from the obligation.

Question 8

Most liens have little practical use, because liens generally do not take priority over other claims to the same property.

Question 9

Federal law provides a minimal framework to protect debtors from losing all their income in order to pay judgment debts.

Question 10

If a debtor's income falls below the median income in the area in which the debtor lives, bankruptcy abuse will be presumed.

Question 11

Foreclosure is a process that allows a lender to legally repossess and auction off the property that is securing a loan.

Question 12

In a few states, if a judgment debtor does not have a family, a creditor may be entitled to collect the full amount realized from the sale of the debtor's home.

Question 13

A mortgage gives a creditor a lien on a debtor's real property as security for payment of a debt.

Question 14

Businesses must be technically insolvent to file for bankruptcy relief.

Question 15

Today, there is no significant difference in the liability of a surety and a guarantor in any state at common law or otherwise.

Question 16

Anyone obligated to a creditor can declare bankruptcy.

Question 17

Debts that remain after a liquidation are not discharged, and the debtor retains his or her obligation to pay them.

Question 18

A mortgagor need not obtain the mortgagee's permission for a short sale.

Question 19

A debtor cannot defend against an involuntary bankruptcy petition because that would be contrary to the definition of involuntary.

Question 20

To initiate a foreclosure, a lender must pay the full amount of the debt, plus any costs that have accrued.

Question 21

In a Chapter 13 proceeding, the debtor retains possession of his or her assets.

Question 22

In a Chapter 7 proceeding, unsecured creditors' claims are subordinate to the claims of secured creditors.

Question 23

Any debtor who is eligible for bankruptcy relief under Chapter 7 is eligible under Chapter 11.

Question 24

In a Chapter 11 proceeding, the role of a debtor in possession is similar to that of a trustee in a Chapter 7 proceeding.

Question 25

Because the purpose of a Chapter 7 proceeding is to provide a debtor with a fresh start, a discharge under Chapter 7 frees a debtor of all of his or her debts.

Question 26

In a Chapter 7 proceeding, the primary effect of a discharge is to void any judgment on a discharged debt and to prohibit any action to collect it.

Question 27

A Chapter 13 proceeding is more expensive and complicated than a Chapter 11 or Chapter 7 proceeding.

Question 28

In a Chapter 7 proceeding if the value of the debtor's estate does not provide sufficient cash to pay all the creditors, it is given back to the debtor.

Question 29

If all classes of creditors accept the debtor's Chapter 11 plan, the court cannot refuse to confirm it.

Question 30

In a Chapter 7 proceeding, at a meeting of creditors, one of the creditors is elected to take over the debtor's assets.

Question 31

Bach borrows funds from City Bank to pay his tuition. Dvorak co-signs the credit application. After the loan agreement is signed, Bach agrees to a higher rate of interest without telling Dvorak, who is thereby

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.

Question 32

Auto Sales & Finance wants to get paid for its goods and services, so it will not sell goods or lend funds unless payment is guaranteed. To obtain those goods or services, a customer or borrower might pledge

A) allegiance.
B) forbearance.
C) collateral.
D) a composition agreement.

Question 33

Equipment Company holds a lien on Fertile Farm's equipment. The equipment can be sold to satisfy the debt

A) if, before the sale, notice is given to Fertile Farm.
B) if, before the sale, notice is given to Fertile Farm's other creditors.
C) if, before the sale, notice is given to the general public.
D) without notice.

Question 34

A debtor who makes false statements under oath may be denied a discharge of his or her debts in the bankruptcy proceeding.

Question 35

The basic duty of a bankruptcy trustee in a Chapter 7 proceeding requires that the trustee be accountable for administering the debtor's estate.

Question 36

Each state permits a debtor in bankruptcy to retain the family home in order to preserve some equity to pay any debts that are discharged.

Question 37

Brew Pub's debt to Credit Service is past due. Credit obtains a judgment against Brew, but the firm refuses to pay. Credit asks the court to order the seizure of Brew's property. This is a request for

A) an artisan's lien.
B) a mechanic's lien.
C) a writ of attachment.
D) a writ of execution.

Question 38

Under Chapter 13, a plan may provide for the payment of all of the debtor's obligations in full.

Question 39

In a Chapter 7 proceeding, the bankruptcy trustee collects the debtor's estate and reduces it to cash, preserving the interests of the debtor and creditors.

Question 40

Petro Refinery asks Quality Bank for a loan to increase its inventory. Quality requires Roma, Petro's president, to sign a personal guaranty to pay the debt if Petro defaults. The guaranty is required to be in writing because

A) the debtor has a right of redemption.
B) the co-signer has a right of contribution.
C) the main purpose rule applies.
D) the main purpose rule does not apply.

Question 41

Gina's creditors attempt to force her into bankruptcy proceedings. The creditors will be unsuccessful if Gina

A) owns a business with ten or more employees.
B) is a farmer.
C) is also a creditor.
D) refuses to comply.

Question 42

In addition to financial statements, each voluntary petition in bankruptcy must include

A) a plan outlining how debt payments will be made.
B) a certificate proving the receipt of credit counseling.
C) a creditors' agreement allowing the debtor to continue in business.
D) statement of preference for one creditor over another.

Question 43

Dana operates Energy Inc., a corporation in the fuel-supply business. Dana wants to create a plan under which the firm pays a portion of its debts, is discharged of the remainder, and is allowed to continue in business. Energy should file a petition in bankruptcy for relief through

A) a liquidation.
B) a reorganization.
C) a repayment plan.
D) an adjustment of debts.

Question 44

Under any chapter of the Bankruptcy Code, failing to file the necessary documents with the debtor's petition for relief can result in

A) an automatic stay.
B) the discharge of the debtor's obligations.
C) the dismissal of the petition.
D) the distribution of the debtor's assets to his or her creditors.

Question 45

A voluntary petition in bankruptcy must include

A) proof of each creditor's claim.
B) a list of the debtor's creditors and the amount of the debt owed to each.
C) all of the choices.
D) statement indicating that the debtor understands basic economics.

Question 46

A bankruptcy trustee must determine whether the debtor's financial situation warrants relief based on a comparison of the debtor's income with

A) the profit of the debtor's creditors.
B) the income of other families in the same state.
C) the wealth available to the debtor's peers.
D) the debtor's expenses.

Question 47

Brie, Cam, and Dei are co-sureties of Edie's debt to Finance LLC. Brie pays the entire debt. Her right of contribution entitles her to recover any amount paid above the surety's obligation from

A) Cam and Dei.
B) Edie.
C) Finance LLC.
D) none of the parties.

Question 48

Because the homestead exemption interacts with other areas of the law that relate to creditors' rights and remedies, it can sometimes operate to cancel out

A) a portion of a lien on a debtor's real property.
B) the creditor's rights in bankruptcy.
C) rights to collateral possessed by the creditor.
D) any right that the creditor has against the debtor.

Question 49

If a voluntary petition in bankruptcy is found to be proper, the court's entry of an order for relief

A) puts into place an automatic stay.
B) discharges the debtor's obligations.
C) dismisses the petition.
D) distributes the debtor's assets to his or her creditors.

Question 50

Under Chapter 7, a debtor who fails to appear at the creditors' meeting when required may be

A) denied a discharge of his or debts in the bankruptcy proceeding.
B) ordered to complete a means test.
C) forced to submit to an examination by the creditors.
D) told to turn over control of his or her property to a bankruptcy trustee.

Question 51

In a Chapter 7 bankruptcy, on a finding that the use of Chapter 7 would constitute substantial abuse, the court is most likely to

A) extend the time for the debtor's payment of overdue debts.
B) allow a creditor to collect a previous judgment on a disputed debt.
C) force a creditor to obtain a new judgment on a claimed debt.
D) dismiss the debtor's petition.

Question 52

To buy a townhouse, Becky obtains a mortgage loan from Countywide Bank. The lender should record the mortgage to

A) be officially on record as holding an interest in the property.
B) secure itself in the position of an unsecured creditor.
C) preserve a copy of the loan in a separate location.
D) obtain reimbursement for a portion of the loan if the debtor defaults.

Question 53

Ran is a surety for Su's loan from Tempo Credit. When Su pays the debt owed to the lender, Ran's right of subrogation entitles the surety to

A) any right that the creditor had against the debtor.
B) a proportionate share of any overpayment due to the loan's prepayment.
C) all outlays made on behalf of the suretyship arrangement.
D) title to and possession of the property serving as collateral for the loan.

Question 54

Qian resides in a state that has a $50,000 homestead exemption. She defaults on a loan extended by Rely Bank, owing $60,000. Her home is sold at auction for $90,000. The creditor is entitled to

A) 0.
B) $30,000.
C) $50,000.
D) $60,000.

Question 55

Under Chapter 7, once the proceeds of the bankruptcy estate have been distributed, the debtor's remaining debts

A) are discharged.
B) paid by the court.
C) renewed without legal action as obligations of the debtor.
D) subject to legal actions to recover any unpaid amounts.

Question 56

A bankruptcy trustee is accountable for

A) administering the debtor's estate.
B) exempting certain property from the bankruptcy.
C) operating a debtor's business to obtain maximum profit for the creditors.
D) commencing actions against the debtor to recover creditors' claims.

Question 57

Under Chapter 7, creditors are paid in a certain order of priority. The highest-priority class comprises claims for

A) debts related to motor vehicles, household goods, and trade tools.
B) domestic support.
C) the debtor's equity in his or her residence.
D) student loans.

Question 58

Because a mortgage involves the transfer of real property, to comply with the Statute of Frauds, it must be

A) in good faith.
B) recorded.
C) written.
D) witnessed by a disinterested third party.

Question 59

Under the Bankruptcy Code, the means test is used to

A) keep higher-income people from abusing the bankruptcy process.
B) force more people to file for Chapter 7 bankruptcy.
C) determine the validity of a statement or claim by any party in interest.
D) prioritize the claims of the creditors in an involuntary proceeding.

Question 60

To purchase a farmhouse, Clay obtains a mortgage loan from Debit Bank. Clay defaults on the payments on the loan. The bank has

A) the right to foreclose on the mortgaged property.
B) the obligation to forbear part or all of the payments for a limited time.
C) the duty to refinance the loan.
D) the option to show a hardship and force a short sale of the property.

Question 61

Under Chapter 13, a repayment plan must provide for

A) the turnover of the debtor's future income to the creditors.
B) full payment of all claims, without exception.
C) the same treatment of each claim within a particular class of claim.
D) all of the choices.

Question 62

Coco and Delany borrow $110,000 from Employees Credit Union to buy a home. The loan is a fixed-rate mortgage at 3.38 percent with a thirty-year term, subject to an acceleration clause, and secured by the home. When the borrowers have paid off $10,000 of the mortgage-still owing $100,000, plus interest-they stop making payments. Meanwhile, the home's market value declines to $85,000. After six months, the lender decides to take steps to recover the unpaid amount of the loan. What are the lender's options? Which option seems most likely? Why? What steps are involved?

Question 63

Baby Day Care, a sole proprietorship, wants to pay as many of its obligations as reasonably possible, and be discharged of the rest. To accomplish this goal, the proprietorship should file a petition in bankruptcy under Chapter 13 for relief through

A) a liquidation.
B) a reorganization.
C) a repayment plan.
D) an adjustment plan.

Question 64

Under Chapter 13, after the completion of all payments under the plan, the court will grant a discharge of

A) only the debts provided for by the plan.
B) only the obligations not provided for by the plan.
C) all claims, whether or not provided for by the plan.
D) all obligations that remain unsatisfied.

Question 65

Compared to Chapter 7 and 11 plans, a Chapter 13 plan

A) permits creditors to force a debtor into involuntary bankruptcy.
B) allows a debtor to retain possession of his or her assets.
C) is more expensive and more complicated.
D) permits any interested party to file a repayment plan.

Question 66

Under Chapter 11, soon after the entry of the order for relief

A) any business debtor can choose to avoid creditors' committees.
B) the debtor's creditors file a plan to distribute the debtor's assets.
C) a creditors' committee of unsecured creditors is appointed.
D) the debtor's assets are liquidated to pay tax claims.

Question 67

At the time of the filing of the petition and the time of the filing of the plan, Chapter 13 imposes on the debtor the requirement of

A) goodwill.
B) good faith.
C) substantial means.
D) sufficient credit.

Question 68

Under Chapter 11, a plan to conserve and administer the debtor's assets must be submitted for acceptance and confirmation to

A) the creditors only.
B) the court only.
C) the creditors and the court.
D) he debtor only.

Question 69

Retail Stores Inc. wants to agree with its creditors on a plan under which it pays a portion of its debt and is discharged of the rest. To accomplish this goal, the corporation should file a petition in bankruptcy under Chapter 11 for relief through

A) a liquidation.
B) a reorganization.
C) a repayment plan.
D) an adjustment plan.

Question 70

Under Chapter 11, the debtor's obligations most likely to be discharged are

A) taxes accruing within the last three years.
B) claims based on the debtor's willful or malicious conduct or fraud.
C) none of the choices.
D) domestic-support obligations.

Question 71

Rashi is a student at State University. To pay tuition, Rashi asks Tempo 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. Upton, a well-known businessperson and a friend of Rashi's family, calls Tempo and agrees to pay the loan if Rashi cannot. Because of Upton'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 Tempo to extend the loan for three months. The lender agrees, raising the interest rate for the extended period. Upton 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 Tempo assert a claim against Upton on the debt?

Question 72

Under Chapter 7, the primary effect of a discharge is to

A) extend the time for the debtor's payment of overdue debts.
B) allow a creditor to collect a previous judgment on a discharged debt.
C) force a creditor to obtain a new judgment on a discharged debt.
D) void a judgment on a discharged debt and prohibit an action to collect it.