Q: BANK-0001: Answers

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Q: BANK-0001
Filing a valid petition in bankruptcy acts as an automatic stay of actions to
Garnish the debtor's wages Collect alimony from the debtor

A. Yes Yes
B. Yes No
C. No Yes
D. No No
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
A: This answer is incorrect. Refer to the correct answer explanation.
B:
Answer B is correct. When a valid petition in bankruptcy is filed, it acts as an automatic

stay which stops the collection of most debts and the enforcement of most legal
proceedings against the debtor's estate. An automatic stay is valid against the garnishment
of the debtor's wages. However, the automatic stay is not effective to prevent the collection
of alimony.
http://127.0.0.1:8082/Print.aspx?q=93507 14.Nov.11
C: This answer is incorrect. Refer to the correct answer explanation.

D: This answer is incorrect. Refer to the correct answer explanation.
Hint
The petition acts as an automatic stay to most debts.
Q: BANK-0002
On February 28, 2008, Master, Inc. had total assets with a fair market value of $1,200,000
and total liabilities of $990,000. On January 15, 2008, Master made a monthly installment
note payment to Acme Distributors Corp., a creditor holding a properly perfected security
interest in equipment having a fair market value greater than the balance due on the note.
On March 15, 2008, Master voluntarily filed a petition in bankruptcy under the liquidation
provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment
was sold for less than the balance due on the note to Acme.
If Master's voluntary petition is filed properly,
Answers
A: Master will be entitled to conduct its business as a debtor-in-possession unless the court
appoints a trustee.
B: A trustee must be appointed by the creditors.
C: Lawsuits by Master’s creditors will be stayed by the Federal Bankruptcy Code.
D: The unsecured creditors must elect a creditors’ committee of three to eleven members to
consult with the trustee.
Answer Explanations
A:
Answer A is incorrect. The court appoints an interim trustee and then the debtor may
regain the property in possession of the interim trustee by filing a court-approved bond.
B:
Answer B is incorrect. The creditors may elect a trustee if they so choose.
C:
Answer C is correct. The filing of the bankruptcy petition acts as an automatic stay of
lawsuits by the debtor's creditors.
D:
Answer D is incorrect. There is no requirement for any creditors to elect a creditors'
committee to consult with the trustee.
Hint
The filing of the petition prevents "grab and take."
Q: BANK-0003
A voluntary bankruptcy proceeding is available to
Answers
A: All debtors provided they are insolvent.
B: Debtors only if the overwhelming preponderance of creditors have not petitioned for and
obtained a receivership pursuant to state law.
C: Corporations only if a reorganization has been attempted and failed.
D: Most debtors even if they are not insolvent.
Answer Explanations
A:
A. Answer A is incorrect because not all debtors are allowed to file for voluntary
bankruptcy. A voluntary bankruptcy proceeding is not available to banks, insurance
companies, and savings and loan associations.
B:
B. Answer B is incorrect because whether the debtor's creditors have petitioned and
obtained a receivership would not affect the debtor's rights to initiate a voluntary
proceeding under Chapter 7 of the Bankruptcy Reform Act.
C:
C. Answer C is incorrect because corporations do not need to first attempt a

reorganization under Chapter 11 before filing a voluntary petition.
D:
D. Answer D is correct because a voluntary bankruptcy proceeding is available to all

debtors who owe debts, irrespective of whether the debtor is insolvent, except for
municipalities, railroads, banks, insurance companies, and savings and loan associations.
Hint
Note that this is a voluntary bankruptcy.
Q: BANK-0004
Wilk owes a total of $50,000 to eight unsecured creditors and one fully secured creditor.
Rusk is one of the unsecured creditors and is owed $14,000. Rusk has filed a petition
against Wilk under the liquidation provisions of the Bankruptcy Code. Wilk has been
unable to pay Wilk's debts as they become due and Wilk's liabilities exceed Wilk's assets.
Wilk has filed the papers that are required to oppose the bankruptcy petition. Which of the
following statements is correct?
Answers
A: The petition will be granted because Wilk is unable to pay Wilk’s debts as they become
due.
B: The petition will be granted because Wilk’s liabilities exceed Wilk’s assets.
C: The petition will be dismissed because three unsecured creditors must join in the filing
of the petition.
D: The petition will be dismissed because the secured creditor failed to join in the filing of
the petition.
Answer Explanations
A:
Answer A is correct. Under an involuntary bankruptcy petition, if there are fewer than 12
creditors, a single creditor may file the petition as long as his/her claim is $13,475 in excess
of any security s/he may hold. If the involuntary petition in bankruptcy is not contested, it
will automatically result in the entry of an order for relief by the bankruptcy court.
However, if the petition is contested, the creditor(s) are required to prove either that the
debtor is not paying his/her debts as they mature, or that during the 120 days preceding the
filing of a petition, a custodian took possession of the debtor’s property. In this situation,
there are fewer than 12 creditors which enables Rusk, as an unsecured creditor owed more
than $13,475, to file a bankruptcy petition against Wilk. Even though Wilk has contested
this bankruptcy petition, it will be granted since Rusk can prove Wilk is unable to pay
Wilk’s debts as they mature.
B:
Answer B is incorrect. The petition will not be granted based on the fact that Wilk is
insolvent in the "bankruptcy sense" (liabilities exceed assets). The creditor must prove that
the debtor is insolvent in the equity sense (unable to pay his/her debts as they become due).
C:
Answer C is incorrect. Only when there are 12 or more creditors is it necessary for at least
3 creditors (whose claims aggregate at least $13,475 over any security held by the
creditors) to sign the petition.
D:
Answer D is incorrect. There is no requirement that a secured creditor join in the filing of a
petition.
Hint
Recall rule for fewer than 12 creditors.
Q: BANK-0005
An involuntary petition in bankruptcy
Answers
A: Will be denied if a majority of creditors in amount and in number have agreed to a
common law composition agreement.
B: Can be filed by creditors only once in a 7-year period.
C: May be successfully opposed by the debtor by proof that the debtor is solvent in the
bankruptcy sense.
D: If not contested will result in the entry of an order for relief by the bankruptcy judge.
Answer Explanations
A:
Answer A is incorrect because the presence of a composition agreement will not cause
denial of an involuntary petition. In many cases a creditor who is left out of such a
composition agreement may wish to file an involuntary petition in order to protect her/his
interest before the debtor uses a major portion of her/his assets in settling the debts owed to
only the creditors involved in the composition agreement.
B:
Answer B is incorrect because there is no requirement as to how often a creditor may file
an involuntary petition. It is the debtor who may not be involved in a petition if they have
been discharged in bankruptcy proceedings within the past 6 years.
C:
Answer C is incorrect because a debtor need only prove that s/he is solvent in the equity
sense (i.e., that s/he is paying her/his debts as they mature) and that a custodian was not
appointed or did not take possession of the debtor's property within 120 days before the
filing of the petition. The debtor need not prove that her/his assets exceed her/his liabilities
(solvency in the bankruptcy sense).
D:
Answer D is correct because an involuntary petition in bankruptcy, if not contested, will

automatically result in the entry of an order for relief by the bankruptcy court. Only if the
petition is contested will the creditor(s) be required to prove either that the debtor is not
paying her/his debts as they mature, or that during the 120 days preceding the filing of a
petition, a custodian was appointed or took possession of the debtor's property.
Hint
An involuntary petition need not be opposed.
Q: BANK-0006
Which of the following assets would be included in a debtor's bankruptcy estate in a
liquidation proceeding?
Answers
A: Proceeds from a life insurance policy received 90 days after the petition was filed.
B: An inheritance received 270 days after the petition was filed.
C: Property from a divorce settlement received 365 days after the petition was filed.
D: Wages earned by the debtor after the petition was filed.
Answer Explanations
A:
Answer A is correct. The debtor's bankruptcy estate includes property owned by the debtor
when the bankruptcy petition is filed. It also includes property owed to the debtor as of the
filing as well as income from property owned by the debtor. Additionally, property
received by the debtor within 180 days after the petition is filed is part of the estate if it is
received by inheritance, bequest, or devise, or from life insurance, a divorce decree, or a
property settlement with one's spouse.
B:
Answer B is incorrect because an inheritance must be received within 180 days after the
filing of the petition to be part of the estate.
C:
Answer C is incorrect because property from a divorce settlement must be received within
180 days after the filing of the petition to be part of the estate.
D:
Answer D is incorrect because debts other than those received by inheritance, bequest, or
devise, or from life insurance, a divorce decree, or a property settlement with one's spouse
are not part of the estate if received after the filing.
Hint
Recall property brought back into the estate.
Q: BANK-0007
A bankrupt who has voluntarily filed for and received a discharge in bankruptcy under the
liquidation provisions (Ch. 7)
Answers
A: Is precluded from owning or operating a similar business for 2 years.
B: Must surrender for distribution to the creditors amounts received as an inheritance if the
receipt occurs within 180 days after filing of the petition.
C: Will receive a discharge of any and all debt owed by him as long as he has not
committed a bankruptcy offense.
D: Can obtain another voluntary discharge in bankruptcy under Ch. 7 after 5 years have
elapsed from the date of the prior filing.
Answer Explanations
A:
Answer A is incorrect because the bankruptcy provisions do not preclude a bankrupt from
owning or operating a similar business for 2 years.
B:
Answer B is correct because a bankrupt's estate consists of property owned at the time of
the filing of the petition and property received by way of inheritance bequest, devise,
property settlement with spouse, divorce decree, or life insurance within 6 months after the
filing of the petition. An inheritance received 180 days after the filing of the petition must
be surrendered for distribution.
C:
Answer C is incorrect because the bankruptcy provisions will not discharge all of a
bankrupt's debts. For example, educational loans, governmental fines and taxes incurred 3
years prior to the filing, and debts arising out of false pretenses are not discharged in
bankruptcy.
D:
Answer D is incorrect because a bankrupt cannot obtain another voluntary discharge in

bankruptcy under Chapter 7 until 6 years have elapsed from the date of the prior filing.
Hint
Also true of involuntary bankruptcy.
Q: BANK-0008
Which of the following is correct with respect to an involuntary bankruptcy proceeding
under the liquidation provisions of the Bankruptcy Code?
Answers
A: It may be commenced against any debtor who is insolvent.
B: The debtor may regain possession of property in the possession of an interim trustee if
the debtor files a bond.
C: The petitioners must automatically file a bond to indemnify the debtor for any loss
caused by the filing of the petition.
D: A trustee must be elected by the creditors immediately after the court orders relief
against the debtor.
Answer Explanations
A:
Answer A is incorrect. Involuntary bankruptcy proceedings cannot be commenced against

all debtors. Farmers, charitable organizations, railroads, banks, and insurance companies
are examples of debtors that are exempt from involuntary bankruptcy proceedings even if
they are insolvent.
B:
Answer B is correct. The debtor may regain possession of property in the possession of an
interim trustee if the debtor files the bond requested by the court.
C:
Answer C is incorrect. The Bankruptcy Code does not require that petitioners file a bond to
indemnify the debtors for any loss caused by the filing of the petition. However, the court
may require the petitioners to file such a bond to deter the filing of frivolous petitions.
D:
Answer D is incorrect. After an order of relief is granted, the court appoints an interim
trustee. A trustee may be elected by creditors at the first creditors' meeting but failure to
elect a trustee results in the interim trustee continuing in office. The creditors are not
required to elect a trustee in order for the bankruptcy proceeding to be completed.
Hint
The debtor should have possession of the property if the creditor's rights are protected.
Q: BANK-0009
Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, certain
property acquired by the debtor after the filing of the petition becomes part of the
bankruptcy estate. An example of such property is
Answers
A: Inheritances received by the debtor within 180 days after the filing of the petition.
B: Child support payments received by the debtor within one year after the filing of the
petition.
C: Social Security payments received by the debtor within 180 days after the filing of the
petition.
D: Wages earned by the debtor within one year after the filing of the petition.
Answer Explanations
A:
Answer A is the correct answer. The estate of the debtor includes property received by the
debtor within 180 days after the filing of the bankruptcy petition received by, among
others, inheritance.
B:
Answer B is incorrect because these need to be received within the 180-day period.
C:
Answer C is incorrect because Social Security payments are not covered in the 180-day
period rule.
D:
Answer D is incorrect because the wages become a “new estate” and are not part of the
estate of the debtor in bankruptcy.
Hint
Under Chapter 7, recall what is covered by the 180-day rule.
Q: BANK-0010
Knox operates an electronics store as a sole proprietor. On April 5, 2008, Knox was
involuntarily petitioned into bankruptcy under the liquidation provisions of the Bankruptcy
Code. On April 20, a trustee in bankruptcy was appointed and an order for relief was
entered. Knox's nonexempt property has been converted to cash, which is available to
satisfy the following claims and expenses as may be appropriate:
Claims and Expenses
Claim by Dart Corp. (one of Knox's suppliers) for computers ordered on $20,000
April 6, 2008, and delivered on credit to Knox on April 10, 2008.
Fee earned by the bankruptcy trustee. $15,000
Claim by Boyd for a deposit given to Knox on April 1, 2008, for a $ 1,500
computer Boyd purchased for personal use but that had not yet been
received by Boyd.
Claim by Noll Co. for the delivery of stereos to Knox on credit. The $ 5,000
stereos were delivered on April 4, 2008, and a financing statement was
properly filed on April 5, 2008. These stereos were sold by the trustee
with Noll's consent for $7,500, their fair market value.
Fees earned by the attorneys for the bankruptcy estate. $10,000
Claims by unsecured general creditors. $ 1,000
The cash available for distribution includes the proceeds from the sale of the stereos. If the
trustee in bankruptcy wishes to avoid Noll's April 4 transaction with Knox as a preferential
transfer, the trustee will
Answers
A: Lose, because the transfer was in fact a substantially contemporaneous exchange for
new value given.
B: Lose, because there is no evidence that Knox was insolvent on April 4.
C: Prevail, because the transfer occurred within 90 days of the filing of the bankruptcy
petition.
D: Prevail, because the financing statement was not filed on the day of delivery.
Answer Explanations
A:
Answer A is correct. Under the Bankruptcy Code, a trustee has the power to set aside
preferential transfers made by the debtor to creditors. Preferential transfers are those made
for antecedent debts which enable the creditor to receive more than s/he would have
otherwise received under the liquidation proceedings. One exception to the trustee's power
to avoid preferential transfers is when a security interest is given by the debtor to acquire
property that is perfected within 10 days after such security interest attaches. This is called
an enabling loan. Consequently, Noll's transaction with Knox qualifies as an enabling loan
and cannot be set aside by the trustee.
B:
Answer B is incorrect. The Bankruptcy Act presumes that the debtor is insolvent during
the 90 days prior to the date the petition was filed. Thus, on April 4 Knox would have been
presumed to be insolvent and the trustee would not have to provide evidence of insolvency.
C:
Answer C is incorrect. Not all transfers occurring within 90 days of the filing of the
bankruptcy petition are preferential transfers. For example, transfers which involve
contemporaneous exchange for new value given are not preferential transfers regardless of
when they occur.
D:
Answer D is incorrect. The financing statement need not be filed on the day of delivery but
must be filed within 10 days after the security interest attaches in order to qualify as an
enabling loan and not be set aside as a preference. In this case, Noll filed within the 10-day
period (the day after delivery) and, thus, the transaction qualifies as an exception to the
trustee's power to avoid preferential transfers.
Hint
Focus on Noll's transaction with Knox.
Q: BANK-0011
The filing of an involuntary petition in bankruptcy
Answers
A: Allows creditors to continue their collection actions against the debtor while the
bankruptcy action is pending.
B: Terminates liens associated with exempt property.
C: Stops the enforcement of a judgment lien against property in the bankruptcy estate.
D: Terminates all security interests in property in the bankruptcy estate.
Answer Explanations
A:
Answer A is incorrect. The filing stays such collection actions so that the court can see that
an orderly disposition of the debts is accomplished under bankruptcy law.
B:
Answer B is incorrect. Liens are still enforceable against exempt property.
C:
Answer C is correct. The filing of an involuntary petition in bankruptcy stops the

enforcement of most collections of debts and legal proceedings against the debtor's estate.
Thus, the enforcement of judgment liens against property in the bankruptcy estate would be
stopped by the filing of the involuntary petition.
D:
Answer D is incorrect. Security interests in property will still be enforced despite a

bankruptcy. When distributing the assets of a debtor's estate, secured creditors have first
priority to the property acting as their collateral.
Hint
The petition stops the enforcement of most debts.
Q: BANK-0012
Skipper was for several years the principal stockholder, director, and chief executive officer
of the Canarsie Grocery Corporation. Canarsie had financial difficulties and an order of
relief was filed against it, and subsequently discharged. Several creditors are seeking to
hold Skipper personally liable as a result of his stock ownership and as a result of his being
an officer-director. Skipper in turn filed with the bankruptcy judge a claim for $1,400
salary due him. Which of the following is correct?
Answers
A: Skipper’s salary claim will be allowed and he will be entitled to a priority.
B: Skipper has no personal liability to the creditors as long as Canarsie is recognized as a
separate legal entity.
C: Skipper cannot personally file a petition in bankruptcy for 6 years.
D: Skipper is personally liable to the creditors for Canarsie’s losses.
Answer Explanations
A:
Answer A is incorrect because claims for services rendered by insiders (a director is an

insider) are only allowed to the extent the court decides the claims are reasonable. Even if
the court decides the claim is reasonable, the priority given to wage claims in a bankruptcy
proceeding does not include salary claims by officers of the corporation.
B:
Answer B is correct because a corporation is considered a separate legal entity from its
owners (the shareholders). Generally, the shareholders are not personally liable for the
debts of the corporation. This is normally true even concerning a principal stockholder
who is a director and chief executive officer of the corporation. However, if the purpose of
incorporation is to defraud the creditors, then the courts will "pierce the corporate veil" and
hold the shareholders personally liable.
C:
Answer C is incorrect because the bankruptcy of the corporation would not affect Skipper's
right to file bankruptcy in the future. The separate legal entity concept would allow
Skipper to file bankruptcy even though Canarsie Grocery Corporation has filed within the
6-year period.
D:
Answer D is incorrect because a corporation is considered a separate legal entity from its
owners (shareholders). Thus, the shareholders are not personally liable for the debts of the
corporation; however, the courts will "pierce the corporate veil" and hold the shareholders
personally liable if the purpose of incorporation is to defraud the creditor.
Hint
Consider purposes of a corporation.
Q: BANK-0013
Six months ago Harold Walsh borrowed $4,000 from the First Financial Credit
Corporation. At that time, First Financial requested and received collateral valued at
$4,500. Other creditors filed an involuntary petition in bankruptcy against Walsh one week
ago. First Financial has since sold the collateral it held for its fair market value. Under
these circumstances
Answers
A: First Financial has a voidable preference.
B: If the collateral sold did not equal the amount due on the loan, First Financial has a
priority over general creditors.
C: The taking of $4,500 collateral to secure a $4,000 loan is a fraudulent conveyance.
D: If the collateral held was of insufficient value to satisfy the debt, First Financial may file
a claim in bankruptcy for any deficiency on the loan to Walsh.
Answer Explanations
A:
Answer A is incorrect because one of the elements which must be present to prove that a
preferential transfer has been made is that the transfer involved an antecedent debt. In this
case, there was a contemporaneous exchange for new value given (i.e. First Financial made
the loan and received collateral at the same time) and no antecedent debt was involved;
thus, no preferential transfer can exist. In addition, even if this transaction had involved an
antecedent debt no preferential transfer would exist because for a general preference to be
present the transfer must be made within 90 days prior to the filing.
B:
Answer B is incorrect because First Financial will become a general creditor for the portion
of the amount due on the loan that remains after the collateral is sold. First Financial had
priority only on the collateral they received and once this was sold they became a general
creditor for any remainder due on the loan.
C:
Answer C is incorrect because a fraudulent conveyance occurs when the debtor receives
less than a reasonably equivalent value in the exchange or if the transfer was made with the
intent to hinder, delay or defraud any creditor. In this situation, First Financial received a
reasonable amount of collateral for the loan they made and no fraudulent conveyance
exists.
D:
Answer D is correct because First Financial may file a claim in bankruptcy when the loan is
not fully satisfied by the proceeds obtained from disposition of the collateral. First
Financial will have the same priority as a general unsecured creditor concerning the unpaid
portion of the debt.
Hint
A secured transaction gives priority but only to the extent of the value of the collateral.
Q: BANK-0014
The Bankruptcy Code provides that a debtor is entitled to claim as exempt property the
right to receive
Social security benefits Disability benefits

A. No No
B. Yes No
C. Yes Yes
D. No Yes
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
A:
Answer A is incorrect because under the Bankruptcy Code, a debtor is entitled to claim as
exempt property the right to receive both social security benefits and disability benefits.
B:
Answer B is incorrect because under the Bankruptcy Code, a debtor is entitled to claim as
C:
Answer C is correct because under the Bankruptcy Code, the debtor has the right to receive
any of the following payments as exempt property: (1) a social security benefit,
unemployment benefit, (2) a veteran's benefit, (3) a disability, illness or unemployment

benefit, (4) alimony, support or separate maintenance to the extent reasonably necessary for
the support of the debtor and any dependents of the debtor, and (5) a payment under a stock
bonus, pension, profit sharing, annuity, or similar plan or contract on account of illness,
disability, death, age, or length of service to the extent reasonably necessary for the support
of the debtor and any dependents of the debtor.
D:
Answer D is incorrect because under the Bankruptcy Code, a debtor is entitled to claim as
Hint
Recall types of exempt property.
Q: BANK-0015
Haplow engaged Turnbow as his attorney when threatened by several creditors with a
bankruptcy proceeding. Haplow's assets consisted of $85,000 and his debts were
$125,000. A petition was subsequently filed and was uncontested. Several of the creditors
are concerned that the suspected large legal fees charged by Turnbow will diminish the size
of the distributable estate. What are the rules of limitation which apply to such fees?
Answers
A: None, since it is within the attorney-client privileged relationship.
B: The fee is presumptively valid as long as arrived at in an arm’s-length negotiation.
C: Turnbow must file with the court a statement of compensation paid or agreed to for
review as to its reasonableness.
D: The trustee must approve the fee.
Answer Explanations
A:
Answer A is incorrect because although the attorney is allowed reasonable compensation,

the fees are subject to filing and review.
B:
Answer B is incorrect because a fee may result from an arm's-length negotiation and still be
disallowed by Bankruptcy Procedure. Claims for services by an attorney of the debtor, to
the extent a fee exceeds a reasonable value for services rendered, are disallowed. The court
must approve the reasonableness of the claim even if the transaction is an arm's-length
negotiation.
C:
Answer C is correct because according to the Rules of Bankruptcy Procedure, it is

necessary to file a proof of claims against the debtor's estate. The filing must be timely
(within a 6-month period) or the claim will be barred. A claim that is filed on time is given
prima facie validity and is approved unless there is an objection by one of the creditors.
The filing would include a statement of compensation paid or agreed.
D:
Answer D is incorrect because it is the courts, not the trustee, which approve the fees.
Hint
Courts can control administrative expenses.
Q: BANK-0016
The trustee in bankruptcy of a landlord-debtor under a Chapter 7 liquidation
Answers
A: Must be elected by the creditors immediately after a bankruptcy petition is filed.
B: May not be appointed by the court after the order for relief has been entered.
C: Must reject the executory contracts of the debtor.
D: May assign the leases of the debtor.
Answer Explanations
A:
Answer A is incorrect. The creditors do not have the opportunity to elect a trustee until the
first creditors' meeting. An interim trustee, who is appointed by the court, serves prior to
the election of the trustee.
B:
Answer B is incorrect. As soon as the order for relief has been entered, the court appoints
an interim trustee to serve until the first creditors' meeting. If the creditors are unable to
agree on the selection of a trustee, the court will then appoint a permanent trustee.
C:
Answer C is incorrect. The trustee has the option of performing or rejecting the executory
contracts of the debtor. The best interests of the debtor's estate will dictate what course of
action the trustee chooses.
D:
Answer D is correct. The trustee may assign the leases of the landlord-debtor if such action
is considered to be in the best interest of the debtor's estate. The trustee's duty is to acquire
as many assets as possible for distribution to the creditors who filed claims in the
bankruptcy proceeding.
Hint
The trustee may reject or perform executory contracts.
Q: BANK-0017
On June 5, 2008, Green rented equipment under a 5-year lease. On March 8, 2009, Green
was involuntarily petitioned into bankruptcy under the liquidation provisions of the
Bankruptcy Code, and a trustee was appointed. The fair market value of the equipment
exceeds the balance of the lease payments due. The trustee
Answers
A: Must assume the equipment lease because its term exceeds 1 year.
B: Must assume and subsequently assign the equipment lease.
C: May elect not to assume the equipment lease.
D: May not reject the equipment lease because the fair market value of the equipment
exceeds the balance of the lease payments due.
Answer Explanations
A:
Answer A is incorrect because although the trustee may elect to assume the equipment
lease, the trustee is not required to.
B:
Answer B is incorrect because although the trustee may elect to assume the equipment
lease, the trustee is not required to.
C:
Answer C is correct because under the provisions of the Bankruptcy Code, the trustee in
bankruptcy is given the option, subject to court approval, to (1) assume and perform the
unexpired lease, (2) assume and assign the unexpired lease to a third party, or (3) reject the
unexpired lease. In a liquidation case, the trustee must act to assume within 60 days after
the order for relief is entered. If not assumed within this time, the lease is deemed rejected.
Thus, the trustee may elect to not assume the equipment lease.
D:
Answer D is incorrect because the trustee may elect to reject the equipment lease regardless
of the fair market value of the equipment.
Hint
The trustee generally may assume or reject the lease.
Q: BANK-0018
In a bankruptcy proceeding, the trustee
Answers
A: Must be an attorney admitted to practice in the federal district in which the bankrupt is
located.
B: Will receive a fee based upon the time and fair value of the services rendered, regardless
of the size of the estate.
C: May not have had any dealings with the bankrupt within the past year.
D: Is the representative of the bankrupt’s estate and as such has the capacity to sue and be
sued on its behalf.
Answer Explanations
A:
Answer A is incorrect because a trustee is either elected by creditors or appointed by a

judge to liquidate the estate. There is no requirement that the trustee be an attorney.
B:
Answer B is incorrect because although a trustee will be allowed reasonable compensation

for services rendered, the amount received can not exceed certain percentages of the money
disbursed by the trustee. The percentages used are specified in the Bankruptcy Code.
Thus, the size of the estate is an important factor in determining the maximum
compensation that the trustee may receive.
C:
Answer C is incorrect because it is permissible for the trustee to have dealings with the
debtor within the prior year.
D:
Answer D is correct because a trustee is the representative of the estate and has the capacity
to sue and be sued.
Hint
Recall the purpose of the trustee.
Q: BANK-0019
On February 28, 2009, Master, Inc. had total assets with a fair market value of $1,200,000
and total liabilities of $990,000. On January 15, 2009, Master made a monthly installment
note payment to Acme Distributors Corp., a creditor holding a properly perfected security
interest in equipment having a fair market value greater than the balance due on the note.
On March 15, 2009, Master voluntarily filed a petition in bankruptcy under the liquidation
provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment
was sold for less than the balance due on the note to Acme.
Master's payment to Acme could
Answers
A: Be set aside as a preferential transfer because the fair market value of the collateral was
greater than the installment note balance.
B: Be set aside as a preferential transfer unless Acme showed that Master was solvent on
January 15, 2005.
C: Not be set aside as a preferential transfer because Acme was oversecured.
D: Not be set aside as a preferential transfer if Acme showed that Master was solvent on
March 15, 2005.
Answer Explanations
B:
Answer B is incorrect. This payment could not be a preferential transfer since the creditor
did not receive more than he would have under a Chapter 7 liquidation. Furthermore, the
need is for the debtor to be insolvent rather than solvent at the point of the alleged
preferential transfer.
C:
Answer C is correct. The trustee has the power to set aside preferential transfers made to a
creditor within 90 days before the filing of the bankruptcy petition while the debtor is
insolvent. To be a preferential transfer, it must be a transfer for an antecedent debt that
enables the creditor to receive more than s/he otherwise would have in a Chapter 7
liquidation. Since the creditor already had a perfected security interest in the equipment, he
did not receive a preferential transfer because at that time the equipment had a fair market
value greater than the note. This is true because perfected security interests have a priority
above all others in the bankruptcy proceedings.
D:
Answer D is incorrect. This is not a preferential transfer whether Master was solvent or not
on any of the dates in the question.
Hint
The creditor already has a perfected security interest.
Q: BANK-0020
One of the elements necessary to establish that a preferential transfer has been made under
the Bankruptcy Code by the debtor to a creditor is that the
Answers
A: Debtor was insolvent at the time of the transfer.
B: Creditor was an insider and the transfer occurred within 90 days of the filing of the
bankruptcy petition.
C: Transfer was in fact a contemporaneous exchange for new value given to the debtor.
D: Transfer was made by the debtor with actual intent to hinder, delay, or defraud other
creditors.
Answer Explanations
A:
Answer A is correct. Under the Bankruptcy Act, one of the elements which must be
established in proving that a preferential transfer was made is that the debtor was insolvent
at the time of the transfer. The Bankruptcy Act presumes that the debtor is insolvent during
the 90 days prior to the date the petition was filed.
B:
Answer B is incorrect. A preferential transfer can be made to a general creditor, as well as

an inside creditor. If the transfer is made to a creditor who is an insider, the transfer may be
voided by the trustee if it occurred within 12 months prior to the filing of the petition.
C:
Answer C is incorrect. One of the elements which must be present to prove that a
preferential transfer has been made is that the transfer involved an antecedent debt. Since
this transfer is a contemporaneous exchange for new value given, no antecedent debt was
involved, and therefore, a preference is not present.
D:
Answer D is incorrect. There is no need to prove that the debtor actually intended to
hinder, delay, or defraud other creditors in order to prove that a preferential transfer
occurred. However, the trustee must prove that the transfer allowed the creditor to receive
more than s/he would have under a Chapter 7 liquidation proceeding.
Hint
Recall the purpose of a preferential transfer.
Q: BANK-0021
The federal bankruptcy act contains several important terms. One such term is "insider."
The term is used in connection with preferences and preferential transfers. Which among
the following is not an "insider"?
Answers
A: A secured creditor having a security interest in at least 25% or more of the debtor’s
property.
B: A partnership in which the debtor is a general partner.
C: A corporation of which the debtor is a director.
D: A close blood relative of the debtor.
Answer Explanations
A:
Answer A is correct. A secured creditor is not an "insider" for the purposes of a

preferential transfer.
B:
Answer B is incorrect. A partner is an insider with regard to a partnership.
C:
Answer C is incorrect. A director is an insider with regard to a corporation.
D:
Answer D is incorrect. A close relative is an insider with regard to a debtor.
Hint
Insiders are generally those close to the business.
Q: BANK-0022
This question is based on the following:
On May 1, 2009, 2 months after becoming insolvent, Quick Corp., an appliance

wholesaler, filed a voluntary petition for bankruptcy under the provisions of Chapter 7 of
the Federal Bankruptcy Code. On October 15, 2008, Quick's board of directors had
authorized and paid Erly $50,000 to repay Erly's April 1, 2008, loan to the corporation.
Erly is a sibling of Quick's president. On March 15, 2009, Quick paid Kray $100,000 for
inventory delivered that day.
Quick's payment to Kray would
Answers
A: Not be voidable, because it was a contemporaneous exchange.
B: Not be voidable, unless Kray knew about Quick’s insolvency.
C: Be voidable, because it was made within 90 days of the bankruptcy filing.
D: Be voidable, because it enabled Kray to receive more than it otherwise would receive
from the bankruptcy estate.
Answer Explanations
A:
Answer A is correct. An important exception to the trustee's power to avoid preferential

transfers is a contemporaneous exchange between the debtor and the creditor whereby the
debtor receives new value. Such is the case in Quick's payment to Kray for newly
delivered inventory.
B:
Answer B is incorrect. Kray's knowledge about Quick's insolvency is not relevant.
C:
Answer C is incorrect. This is one of the requirements for a voidable preferential transfer.
Quick's payment to Kray, however, meets the contemporaneous exchange exception.
D:
Answer D is incorrect. This is one of the requirements for a voidable preferential transfer.
Quick's payment to Kray, however, meets the contemporaneous exchange exception.
Hint
Recall exceptions to preferential transfers.
Q: BANK-0023
Under the Bankruptcy Code, one of the elements that must be established in order for the
trustee in bankruptcy to void a preferential transfer to a creditor who is not an insider is that
Answers
A: The transferee-creditor received more than he would have received in a liquidation
proceeding under the Bankruptcy Code.
B: Permission was received from the bankruptcy judge prior to the trustee’s signing an
order avoiding the transfer.
C: The transfer was in fact a contemporaneous exchange for new value given to the debtor.
D: The transferee-creditor knew or had reason to know that the debtor was insolvent.
Answer Explanations
A:
Answer A is correct because under the Bankruptcy Code, one of the elements which must
be established in proving that a preferential transfer was made is that the transferee-creditor
received more than he would have received in a liquidation proceeding.
B:
Answer B is incorrect because a trustee need not obtain the permission from the bankruptcy
judge prior to avoiding a preferential transfer.
C:
Answer C is incorrect because one of the elements which must be present to prove that a
preferential transfer has been made is that the transfer involved an antecedent debt. Since
the transfer described in answer C was a contemporaneous exchange for new value given,
no antecedent debt was involved; thus, no preferential transfer can exist.
D:
Answer D is incorrect because the question asks what element is necessary to prove that a
preferential transfer to a creditor who is not an insider exists. Although the element
described in answer D is necessary when proving that an insider preference has occurred
within 1 year of the filing of the bankruptcy petition, it is not a necessary element needed to
prove that a general preference has occurred within 90 days of the filing of the bankruptcy
petition.
Hint
Recall reason for preferential transfer.
Q: BANK-0024
If a secured party's claim exceeds the value of the collateral of a bankrupt, he will be paid
the total amount realized from the sale of the security and will
Answers
A: Not have any claim for the balance.
B: Become a general creditor for the balance.
C: Retain a secured creditor status for the balance.
D: Be paid the balance only after all general creditors are paid.
Answer Explanations
A:
Answer A is incorrect because if the value of the collateral is insufficient to satisfy the
claim, the secured party becomes a general creditor for the remaining balance. Thus, the
creditor does have a claim for the balance.
B:
Answer B is correct. A secured creditor has a security interest in the personal property of
the debtor which is acting as collateral for the debt. In a bankruptcy proceeding, there is an
order of priorities concerning distribution of the debtor's estate. Secured creditors are given
first priority in the sense that property subject to a valid security interest is not part of the
estate for distribution purposes but belongs to the secured creditor to the extent of his
security interest. The secured party can either take the property or its cash equivalent. If
the value of the property is insufficient to satisfy the claim, the secured creditor becomes a
general creditor for the balance.
C:
Answer C is incorrect because although the secured party does have a claim to the balance,
the party's status will be that of an unsecured general creditor. The creditor does not retain
the status of a secured party for the balance.
D:
Answer D is incorrect because the secured party will become a general creditor for the
remaining balance. Thus, the creditor will share in all remaining assets with the other
general creditors and not wait for them to be paid first.
Hint
The collateral gives the secured party the highest priority. Any deficiency is given the
lowest priority.
Q: BANK-0025
Peters Co. repairs computers. On February 9, 2005, Stark Electronics Corp. sold Peters a
circuit tester on credit. Peters executed an installment note for the purchase price, a
security agreement covering the tester, and a financing statement that Stark filed on
February 11, 2005. On April 13, 2005, creditors other than Stark filed an involuntary
petition in bankruptcy against Peters. What is Stark's status in Peters' bankruptcy?
Answers
A: Stark will be treated as an unsecured creditor because Stark did not join in the filing
against Peters.
B: Stark’s security interest constitutes a voidable preference because the financing
statement was not filed until February 11.
C: Stark’s security interest constitutes a voidable preference because the financing
statement was filed within 90 days before the bankruptcy proceeding was filed.
D: Stark is a secured creditor and can assert a claim to the circuit tester that will be superior
to the claims of Peters’ other creditors.
Answer Explanations
A:
Answer A is incorrect. Secured parties do not need to join in the filing of the bankruptcy
petition.
B:
Answer B is incorrect. A transfer involving a purchase money security interest is an

exception to the voidable preference. Furthermore, the fact that Stark did not file until
February 11 does not cause a problem because when a purchase money security interest
covers noninventory collateral (such as equipment in this question), the secured party has
priority if s/he files within 10 days of the debtor obtaining possession of the collateral.
C:
Answer C is incorrect. Even though the filing of the financing statement took place within
90 days before the bankruptcy petition was filed, it is not a voidable preference because the
transfer was in the ordinary course of business and within 45 days of the creation of the
debt. This is an exception causing the transfer not to be a voidable preference.
D:
Answer D is correct. Stark is a secured creditor who perfected his security interest by filing
on February 11, 2005. His claim on the collateral (i.e., the circuit tester, is superior to
claims of Peters' other creditors).
Hint
Recall the priority of secured parties.
Q: BANK-0026
This question is based on the following:
Knox operates an electronics store as a sole proprietor. On April 5, 2008, Knox was
involuntarily petitioned into bankruptcy under the liquidation provisions of the Bankruptcy
Code. On April 20, a trustee in bankruptcy was appointed and an order for relief was
entered. Knox's nonexempt property has been converted to cash, which is available to
satisfy the following claims and expenses as may be appropriate:
Claims and Expenses
Claim by Dart Corp. (one of Knox's suppliers) for computers ordered on

April 6, 2009, and delivered on credit to Knox on April 10, 2009. $20,000
Fee earned by the bankruptcy trustee. $15,000
Claim by Boyd for a deposit given to Knox on April 1, 2009, for a
computer Boyd purchased for personal use but that had not yet been $ 1,500
received by Boyd.
Claim by Noll Co. for the delivery of stereos to Knox on credit. The
stereos were delivered on March 4, 2009, and a financing statement
was properly filed on March 5, 2009. These stereos were sold by the
trustee with Noll's consent for $7,500, their fair market value. $ 5,000
Fees earned by the attorneys for the bankruptcy estate. $10,000
Claims by unsecured general creditors. $ 1,000
The cash available for distribution includes the proceeds from the sale of the stereos.
What amount will be distributed to Boyd if the cash available for distribution is $50,800?
Answers
A: $ 480
B: $ 800
C: $1,500
D: $1,800
Answer Explanations
B:
Answer B is correct. When distributing the assets of the debtor's estate, the trustee must
follow priorities prescribed by bankruptcy law. In this case the first $5,000 of the
remaining assets would be paid to Noll Co. since secured creditors have first priority
concerning the property acting as their collateral. The next $25,000 would be paid to the
trustee ($15,000) and attorneys ($10,000) because administrative costs are first priority
among unsecured creditors. Next, $20,000 of the remaining $20,800 ($50,800 - $5,000 -
$25,000) would be distributed to claims arising in the ordinary course of the debtor's
business after the involuntary bankruptcy petition is filed but before the order for relief is
entered. Since Dart Corp. is the only remaining creditor which falls into this category, it
will be paid the full $20,000 owed it, leaving $800 ($20,800 - $20,000. Of the remaining
creditors, Boyd is given a higher priority since consumers' deposits for undelivered goods
or services (subject to a limit per individual) is given a higher priority than general,
unsecured creditors. Thus, Boyd will receive the remaining $800.
C: This answer is incorrect. Refer to the correct answer explanation.

D: This answer is incorrect. Refer to the correct answer explanation.
Hint
Calculate the dollar amounts that go to each level of priority.
Q: BANK-0027
Which of the following unsecured debts of $500 each would have the highest relative
priority in the distribution of a bankruptcy estate in a liquidation proceeding?
Answers
A: Tax claims of state and municipal governmental units.
B: Liabilities to employee benefit plans arising from services rendered during the month
preceding the filing of the petition.
C: Claims owed to customers who gave deposits for the purchase of undelivered consumer
goods.
D: Wages earned by employees during the month preceding the filing of the petition.
Answer Explanations
A:
Answer A is incorrect because taxes owed to the federal, state, or local government involve
the next to last priority (i.e., just above unsecured creditors).
B:
Answer B is incorrect because contributions to employee benefits plans within the prior
180 days receive a priority after employees' wages. This priority has a maximum limit of
$5,400 per employee reduced by the amount received under the wages priority.
C:
Answer C is incorrect because consumer deposits for undelivered goods or services have a
lower priority than both the wages and the contributions to employee benefit plans.
D:
Answer D is correct. The Bankruptcy Reform Act establishes the priorities for the
satisfaction of claims against the debtor in a bankruptcy proceeding. Of those claims listed
in this question, the one that has the highest priority would be the employees' wages since
they were earned within 90 days before the filing of the petition in bankruptcy and are less
than the $5,400 maximum allowed per employee.
Hint
Recall the priorities.
Q: BANK-0028
Branson Corporation voluntarily filed a petition in bankruptcy on January 2 of the current
year. Branson owes the following debts:
I. $500 to an appraiser for help in appraising the assets in the bankruptcy estate.
II. Wages of $3,000 to an employee for December of the previous year just
concluded.
III. Timely claims of general, unsecured creditors of $30,000.
IV. State and federal taxes of $10,000 owed.
What is the priority from highest to lowest, of these claims in the bankruptcy proceedings?
Answers
A: I, II, III, IV.
B: I, II, IV, III.
C: IV, II, I, III.
D: IV, I, III, II.
Answer Explanations
A:
Answer A is incorrect because taxes owed have a higher priority than the claims of general
unsecured creditors.
B:
Answer B is correct. The liability to the appraiser is an administration cost and, therefore,
receives the highest priority. Of those listed, the salary owed to the employee is the next
highest because it was accrued within the previous 90 days before the filing of the petition
and was for no more than $5,400. The state and federal taxes owed receive a low priority
but still higher than the claims of the general creditors.
C:
Answer C is incorrect because administration costs have the highest priority of unsecured
claims.
D:
Answer D is incorrect because administration costs have the highest priority of unsecured
claims.
Hint
Recall priority of claims in bankruptcy proceedings.
Q: BANK-0029
Various creditors are seeking payment for debts of a corporation that has been forced into
bankruptcy. Show from highest to lowest the priorities of the following debts of the
corporation.
I. Legal fees owed to a law firm for services not connected with the bankruptcy.
II. Fees owed appraisers who aided in the sale of the corporation's assets for the
bankruptcy proceedings.
III. State taxes the corporation owes for the previous year.
Answers
A: I, III, II.
B: II, I, III.
C: II, III, I.
D: III, II, I.
Answer Explanations
A:
Answer A is incorrect because this one actually lists the priority from lowest to highest.
B:
Answer B is incorrect because the legal fees unconnected to the bankruptcy receive the
lowest priority.
C:
Answer C is correct. The fees owed the appraisers are administrative costs and receive the
highest priority. The legal costs unconnected to the bankruptcy are not administration
costs. The law firm therefore is a general creditor and gets the lowest priority.
D:
Answer D is incorrect because the appraisers fees receive the highest priority since they are
administration costs.
Hint
Administration costs are the highest level of priority.
Q: BANK-0030
Dark Corp. is a general creditor of Blue. Blue filed a petition in bankruptcy under the
liquidation provisions of the Bankruptcy Code. Dark wishes to have the bankruptcy court
either deny Blue a general discharge or not have its debt discharged. The discharge will be
granted and it will include Dark's debt even if
Answers
A: Dark’s debt is unscheduled.
B: Dark was a secured creditor which was not fully satisfied from the proceeds obtained
upon disposition of the collateral.
C: Blue has unjustifiably failed to preserve the records from which Blue’s financial
condition might be ascertained.
D: Blue had filed for and received a previous discharge in bankruptcy under the liquidation
provisions within 6 years of the filing of the present petition.
Answer Explanations
A:
Answer A is incorrect because unscheduled debts are not discharged in a bankruptcy

proceeding.
B:
Answer B is correct because the fact that the debt of a secured party was not fully satisfied
from the proceeds obtained from disposition of the collateral will not result in a denial of a
general discharge, nor will the remaining portion of the secured debt be nondischargeable.
In such situations the secured party has the same priority as a general unsecured creditor
(lowest priority) concerning the unpaid portion of the debt.
C:
Answer C is incorrect because a debtor who fails to keep books will be denied a general
discharge.
D:
Answer D is incorrect because a debtor who has received a previous discharge in

bankruptcy under the liquidation provisions within 6 years will be denied a general
discharge.
Hint
Secured creditors have the highest priority up to the collateral's value. Any deficiency is
granted the lowest priority.
Q: BANK-0031
A debtor will be denied a discharge in bankruptcy if the debtor
Answers
A: Failed to timely list a portion of his debts.
B: Unjustifiably failed to preserve his books and records which could have been used to
ascertain the debtor’s financial condition.
C: Has negligently made preferential transfers to favored creditors within 90 days of the
filing of the bankruptcy petition.
D: Has committed several willful and malicious acts which resulted in bodily injury to
others.
Answer Explanations
A:
Answer A is incorrect because the failure to list a portion of the debts will result only in the
denial of discharge of those specific debts not listed.
B:
Answer B is correct because a debtor will be denied a general discharge if that debtor
destroyed, falsified, concealed, or failed to keep books of account or record unless such act
was justified under the circumstances.
C:
Answer C is incorrect because a negligent preferential transfer to favored creditors within

90 days of the filing will merely result in the setting aside of the transfer by the trustee; a
general discharge will not be denied. However, had the transfer been a fraudulent
conveyance (i.e., a transfer made with the intent to hinder, delay, or defraud any creditor)
the court would have sufficient grounds to deny a general discharge.
D:
Answer D is incorrect because only those debts which were directly caused by the
commission of willful and malicious acts will be nondischargeable. A general discharge
may still be granted.
Hint
The bankruptcy court must have enough information to make a fair decision.
Q: BANK-0032
A claim will not be discharged in a bankruptcy proceeding if it
Answers
A: Is brought by a secured creditor and remains unsatisfied after receipt of the proceeds
from the disposition of the collateral.
B: Is for unintentional torts that resulted in bodily injury to the claimant.
C: Arises from an extension of credit based upon false representations.
D: Arises out of the breach of a contract by the debtor.
Answer Explanations
A:
Answer A is incorrect. If a secured creditor is still owed money after resorting to the
collateral, s/he may get paid as a general unsecured creditor for the amount still owed.
B:
Answer B is incorrect. Intentional torts (i.e., negligence) are dischargeable.
C:
Answer C is correct. Even when a general discharge is granted, there are certain debts that
are not dischargeable by bankruptcy. Included in these are liabilities that arose from
intentionally obtaining property or money by false representations or fraud.
D:
Answer D is incorrect. Claims arising from a breach of contract are dischargeable.
Hint
Intentional torts are not dischargeable in bankruptcy.
Q: BANK-0033
On May 5, 2009, Bold obtained a $90,000 judgment in a malpractice action against Aker, a
physician. On June 2, 2009, Aker obtained a $75,000 loan from Tint Finance Co. by
knowingly making certain false representations to Tint. On July 7, 2009, Aker filed a
voluntary petition in bankruptcy under the liquidation provisions of the Bankruptcy Code.
Both Bold and Tint filed claims in Aker's bankruptcy proceeding. Assets in Aker's
bankruptcy estate are exempt. Bold's claim
Answers
A: Will be excepted from Aker’s discharge in bankruptcy.
B: Will cause Aker to be denied a discharge in bankruptcy.
C: Will be set aside as a preference.
D: Will be discharged in Aker’s bankruptcy proceeding.
Answer Explanations
A:
Answer A is incorrect because Bold's claim would be excepted from Aker's discharge in
bankruptcy if the claim was based on willful or malicious misconduct of the debtor (Aker).
In this situation, Bold's claim was based on negligence, not willful or malicious
misconduct.
B:
Answer B is incorrect because the tort of negligence is not an act that would bar a general
discharge of all debts.
C:
Answer C is incorrect because Bold's claim is not a preference. A preference is defined as
a transfer of property to a creditor in satisfaction of an antecedent debt made within 90 days

prior to the filing of the bankruptcy petition while the debtor is solvent in the bankruptcy
sense.
D:
Answer D is correct because when a debtor is granted a discharge in a bankruptcy

proceeding, most of the debtor's obligations are discharged. A debt arising from the
negligence of the debtor is a dischargeable debt. Therefore, Bold's claim will be
discharged. If Bold's claim was based on willful or malicious misconduct of the debtor,
then the debt would not be discharged.
Hint
Intentional torts are not dischargeable, but negligent torts are.
Q: BANK-0034
On May 5, 2009, Bold obtained a $90,000 judgment in a malpractice action against Aker, a
physician. On June 2, 2009, Aker obtained a $75,000 loan from Tint Finance Co. by
knowingly making certain false representations to Tint. On July 7, 2009, Aker filed a
voluntary petition in bankruptcy under the liquidation provisions of the Bankruptcy Code.
Both Bold and Tint filed claims in Aker's bankruptcy proceeding. Assets in Aker's
bankruptcy estate are exempt. Tint's claim
Answers
A: Will be excepted from Aker’s discharge in bankruptcy.
B: Will cause Aker to be denied a discharge in bankruptcy.
C: Will be set aside as a preference.
D: Will be discharged in Aker’s bankruptcy proceeding.
Answer Explanations
A:
Answer A is correct because when a debtor is granted a discharge in a bankruptcy

proceeding, most of the debtor's debts are discharged. However, certain of the debtor's
obligations are not discharged. Tint's claim is an example of a nondischargeable debt
because Aker obtained credit from Tint through the use of false information. Such debts
are not dischargeable.
B:
Answer B is incorrect because Aker's misrepresentations to Tint constitutes an action which

is not sufficient to bar Aker from a general discharge.
C:
Answer C is incorrect because Tint's claim is not a preference. A preference is defined as a

transfer of property to a creditor in satisfaction of an antecedent debt made within 90 days
prior to the filing of the bankruptcy petition while the debtor is insolvent in the bankruptcy
sense.
D:
Answer D is incorrect because Tint's claim will not be discharged in Aker's bankruptcy
proceeding.
Hint
Intentional torts are not dischargeable in bankruptcy.
Q: BANK-0035
In general, which of the following debts will be discharged under the voluntary liquidation
provisions of the Bankruptcy Code?
Answers
A: Debts incurred after the order for relief but before the debtor receives a discharge in
bankruptcy.
B: Income taxes due as the result of filing a fraudulent return 7 years prior to the filing of
the bankruptcy petition.
C: A debt arising before the filing of the bankruptcy petition due to the debtor’s negligence.
D: Alimony payments owed to the debtor’s spouse under a separation agreement entered
into prior to the filing of the bankruptcy question.
Answer Explanations
A:
Answer A is incorrect because only debts which are incurred prior to the issuance of the
order for relief will be discharged. Debts incurred after the order for relief are excluded
from the bankruptcy proceeding and will not be discharged.
B:
Answer B is incorrect because income taxes which are due as the result of filing a
fraudulent return will not be discharged in bankruptcy regardless of when the return was
filed. However, had the taxes been due as a result of filing a return which was not
fraudulent, this debt would have been discharged since only tax claims of this nature which
are due within 3 years of filing a bankruptcy petition are not discharged.
C:
Answer C is correct because under the voluntary liquidation provisions of the Bankruptcy
Code, a debt arising before the filing of the bankruptcy petition due to the debtor's
negligence will be discharged in the proceedings. Note that had the debt been due to the
debtor's willful and intentional torts, it would not be discharged in bankruptcy.
D:
Answer D is incorrect because alimony owed to a spouse is specifically listed as a debt

which cannot be discharged by bankruptcy.
Hint
Debts due to intentional torts are not dischargeable but those due to negligence are.
Q: BANK-0036
Barkam is starting a new business, Barkham Enterprises, which will be a sole
proprietorship selling retail novelties. Barkam recently received a discharge in bankruptcy,
but certain proved claims were unpaid because of lack of funds. Which of the following
would be a claim against Barkham?
Answers
A: The unpaid amounts owed to secured creditors who received less than the full amount
after resorting to their security interest and receiving their bankruptcy dividend.
B: The unpaid amounts owed to trade suppliers for goods purchased and sold by Barkam in
the ordinary course of his prior business.
C: A personal loan by his father made in an attempt to stave off bankruptcy.
D: The unpaid amount of taxes due to the United States which became due and owing
within 3 years preceding bankruptcy.
Answer Explanations
A:
Answer A is incorrect because the unpaid balances owed to secured creditors will be
completely discharged in bankruptcy. Once these claims are discharged, the debtor no
longer has any obligation to the creditors.
B:
Answer B is incorrect because unpaid amounts owed to trade suppliers for goods purchased
will be completely discharged in bankruptcy. Once these claims are discharged, the debtor
has no obligation to the trade suppliers.
C:
Answer C is incorrect because a personal loan from the debtor's father will be completely
discharged in bankruptcy. Once the loan has been discharged, the debtor has no obligation
to his father.
D:
Answer D is correct because any unpaid amount of taxes due to the United States or to any
state or subdivision thereof from within 3 years preceding bankruptcy is not discharged by
the bankruptcy proceeding.
Hint
Which debts are not dischargeable in bankruptcy?
Q: BANK-0037
A discharge of a bankrupt debtor is a release from all debts except those that are not
dischargeable. However, certain acts can bar a general discharge. Which of the following
acts of the debtor will result in a bar to a general discharge?
I. Failing to explain satisfactorily a loss of assets that should have ended up in the
estate.
II. Making false claims against the estate.
III. Taking out bankruptcy 3 years earlier.
Answers
A: II only.
B: III only.
C: II and III only.
D: I, II, and III.
Answer Explanations
A:
Answer A is incorrect because although making false claims against the estate does bar a
general discharge, so will the other acts.
B:
Answer B is incorrect because although taking out bankruptcy any time within the previous
6 years will bar a current general discharge, the other acts listed will also do so.
C:
Answer C is incorrect because any of the three acts listed suffice.
D:
Answer D is correct. Any of the three acts listed will bar a general discharge. In the case
of the third act, the rule bars a general discharge if the debtor took out bankruptcy within
the previous 6 years.
Hint
Being discharged in bankruptcy proceedings within the past 6 years is an act that bars
discharge of all debts.
Q: BANK-0038
Hard Times, Inc., is insolvent. Its liabilities exceed its assets by $13 million. Hard Times
is owned by its president, Waters, and members of his family. Waters, whose assets are
estimated at less than a million dollars, guaranteed the loans of the corporation. A
consortium of banks is the principal creditor of Hard Times, having loaned it $8 million,
the bulk of which is unsecured. The banks decided to seek reorganization of Hard Times
and Waters has agreed to cooperate. Regarding the proposed reorganization
Answers
A: Waters’ cooperation is necessary since he must sign the petition for a reorganization.
B: If a petition in bankruptcy is filed against Hard Times, Waters will also have his
personal bankruptcy status resolved and relief granted.
C: Only a duly constituted creditors committee may file a plan of reorganization of Hard
Times.
D: Hard Times will remain in possession unless a request is made to the court for the
appointment of a trustee.
Answer Explanations
A:
Answer A is incorrect because a corporate reorganization can be voluntary or involuntary.
B:
Answer B is incorrect because Waters, as a separate entity from Hard Times, will not have
his personal bankruptcy status resolved when a petition is filed against Hard Times. Waters
may be forced into bankruptcy by a separate petition, but since the corporation is a separate
entity from Waters, the filing of a petition for bankruptcy against Hard Times will not
automatically cause Waters' bankruptcy status to be resolved.
C:
Answer C is incorrect because in a Chapter 11 reorganization only the debtor may file a
plan within the first 120 days after the date of the order for relief. If the debtor does not
meet the 120-day deadline, any party in interest can propose a plan, but at no time is a
"duly constituted creditors committee" the only party able to file a plan.
D:
Answer D is correct because under a Chapter 11 reorganization, a debtor is allowed to

remain in possession of its business unless the court upon request by a party in interest
appoints a trustee to take over management of the debtor's business. The court will approve
such a request when it appears gross mismanagement of the business has occurred, or that
the takeover by a trustee would be in the best interest of the debtor's estate.
Hint
A reorganization can allow the debtor to keep operating.
Q: BANK-0039
As an alternative to bankruptcy liquidation, a business may reorganize under Chapter 11 of
the Bankruptcy Code. Such a reorganization
Answers
A: Requires the appointment of a trustee to administer the debtor organization.
B: May be commenced by filing either a voluntary or involuntary petition.
C: Never requires the appointment of a creditors’ committee.
D: May not be confirmed unless all creditors accept the plan.

Answer Explanations
A:
Answer A is incorrect. Often a trustee is not appointed to administer the reorganization. A

trustee may be appointed "for cause" or "in the interest of the creditors" if a party of interest
requests it.
B:
Answer B is correct. A business reorganization under Chapter 11 of the Bankruptcy Code

is an alternative to a straight bankruptcy. It may be commenced by either the debtor filing
a voluntary petition or the creditors filing an involuntary petition.
C:
Answer C is incorrect. The creditors' committee is required and selected from the
unsecured creditors once the court grants an order for relief.
D:
Answer D is incorrect. All creditors need not agree to the court-supervised rehabilitation
plan under the Chapter 11 reorganization.
Hint
A reorganization allows for a lot of flexibility.
Q: BANK-0040
Lux Corp. has been suffering large losses for the past 2 years. Because of its inability to
meet current obligations, Lux has filed a petition for reorganization under Chapter 11 of the
Bankruptcy Code. The reorganization provisions under the Bankruptcy Code
Answers
A: Require that the court appoint a trustee in all cases.
B: Permit Lux to remain in possession of its assets.
C: Apply only to involuntary bankruptcy.
D: Will apply to Lux only if Lux is required to register pursuant to the federal securities
laws.
Answer Explanations
A:
Answer A is incorrect. The courts aren't required to appoint a trustee. The court will only
appoint a trustee if one is requested by a party in interest to take over the debtor's business.
The court will approve such a request when there is evidence of fraudulent actions by the
debtor, gross mismanagement of the business, or it appears that the takeover by the trustee
would be in the best interest of the debtor's estate.
B:
Answer B is correct. Under a Chapter 11 reorganization normally a debtor is allowed to

remain in possession of its assets. The purpose of a Chapter 11 reorganization is to keep
the financially troubled firm in business.
C:
Answer C is incorrect. Chapter 11 business reorganizations permits both voluntary and

involuntary proceedings.
D:
Answer D is incorrect. There is no such relationship between the provisions of the

Bankruptcy Code and the registration requirements of the federal securities laws.
Hint
The debtor can keep possession of the assets as long as the creditors' rights are protected.
Q: BANK-0041
Which of the following statements is correct under the Reorganization Chapter of the
Bankruptcy Code if the debtor remains in possession of its business?
I. The debtor has the right to be compensated in the same manner as a trustee.
II. The debtor has the right to retain its own accountant to represent it despite the
debtor's employment of that accountant prior to the commencement of the
Reorganization proceeding.
Answers
A: I only.
B: II only.
C: I and II.
D: Neither I nor II.
Answer Explanations
A:
Answer A is incorrect because the Bankruptcy Code states that although the debtor in
possession does have many of the same rights as a trustee, it does not have the right to be
compensated in the same manner.
B:
Answer B is correct because under the Reorganization Chapter of the Bankruptcy Code, a
person is not disqualified for employment by a debtor because of such person's
employment by the debtor before the commencement of the Reorganization proceedings.
Therefore, the debtor does have the right to retain its own accountant to represent it. The
Code also states that although the debtor in possession does have many of the same rights
as a trustee, it does not have the right to be compensated in the same manner.
C:
Answer C is incorrect because although the debtor does have the right to retain its own
accountant, the debtor does not have the right to be compensated in the same manner as a
trustee. Thus, statement I is false.
D:
Answer D is incorrect because the debtor does have the right to retain its own accountant to
represent it. Thus, statement II is true.
Hint
Those helping debtor before a reorganization may also help after.
Q: BANK-0042
Chapter 11 of the Bankruptcy Reform Act of 1978 deals with reorganizations. This
Chapter
Answers
A: Is exclusively available to corporations.

B: Permits the debtor-in-possession to continue to operate the business in the same manner
as a Chapter 11 trustee.
C: Provides for filing of voluntary petitions but prohibits the filing of involuntary petitions.
D: Provides separate procedures for corporations with publicly held securities.
Answer Explanations
A:
Answer A is incorrect because Chapter 11 reorganizations are available to most individuals,

partnerships, and corporations that are eligible for Chapter 7 liquidations.
B:
Answer B is correct because Chapter 11 of the Bankruptcy Reform Act of 1978 permits the
debtor-in-possession to continue to operate the business in the same manner as a Chapter
11 trustee. However, the creditors' committee may request the appointment of a trustee to
displace the debtor-in-possession.
C:
Answer C is incorrect because Chapter 11 provides that reorganization cases may be

voluntary or involuntary.
D:
Answer D is incorrect because Chapter 11 does not have separate procedures for
corporations with publicly held securities.
Hint
A reorganization allows the business to keep going.
Q: BANK-0043
Under Chapter 11 of the Federal Bankruptcy Code, which of the following actions is
necessary before the court may confirm a reorganization plan?
Answers
A: Provision for full payment of administration expenses.
B: Acceptance of the plan by all classes of claimants.
C: Preparation of a contingent plan of liquidation.

D: Appointment of a trustee.
Answer Explanations
A:
Answer A is correct. Under Chapter 11 of the Federal Bankruptcy Code, a business may be
allowed to continue its operations and keep its business assets. The court-supervised
reorganization plan provides for payment of all or part of the debts over an extended
period. The claims are divided into classes of similar claims so that they can be treated
equally. For the court to confirm the reorganization plan, it must provide for full payment
of administration expenses.
B:
Answer B is incorrect. The court does not require that all creditors or all classes of
creditors accept the plan.
C:
Answer C is incorrect. There is no requirement of a contingent plan of liquidation.
D:
Answer D is incorrect. Under a Chapter 11 bankruptcy, although a trustee may be

appointed for cause, a trustee is often not appointed.
Hint
Administration costs are needed to complete the work for the bankruptcy proceedings.
Q: BANK-0044
Under the federal Bankruptcy Code, which of the following rights or powers does a trustee
in bankruptcy not have?
Answers
A: The power to prevail against a creditor with an unperfected security interest.
B: The power to require persons holding the debtor's property at the time the bankruptcy
petition is filed to deliver the property to the trustee.
C: The right to use any grounds available to the debtor to obtain the return of the debtor's
property.
D: The right to avoid any statutory liens against the debtor's property that were effective
before the bankruptcy petition was filed.

Answer Explanations
A:
Answer A is incorrect because the trustee in bankruptcy may set aside security interests that
are not perfected before the filing of the bankruptcy petition.
B:
Answer B is incorrect because the trustee has the duty to obtain and liquidate the debtor’s
property to pay the creditors.
C:
Answer C is incorrect because the trustee has the right to use any legal grounds available to
the debtor to obtain the debtor’s property to pay off the creditors.
D:
Answer D is correct. The requirement is to identify the rights or powers of a trustee in

bankruptcy. Under the federal Bankruptcy Code, a trustee in bankruptcy may set aside
statutory liens that become effective when the bankruptcy petition is filed but may not set
aside those that were effective before the bankruptcy petition was filed. Therefore,
Answer D is correct.
Hint
Security interest must be filed on a timely basis.
Q: BANK-0045
On April 1, Roe borrowed $100,000 from Jet to pay Roe’s business expenses. On June 15,
Roe gave Jet a signed security agreement and financing statement covering Roe’s
inventory. Jet immediately filed the financing statement. On July 1, Roe filed for
bankruptcy. Under the federal Bankruptcy Code, can Roe’s trustee in bankruptcy set aside
Jet’s security interest in Roe’s inventory?
Answers
A: Yes, because a security agreement may only cover goods actually purchased with the
borrowed funds.
B: Yes, because Roe giving the security interest to Jet created a voidable preference.
C: No, because the security interest was perfected before Roe filed for bankruptcy.
D: No, because the loan proceeds were used for Roe’s business.
Answer Explanations
A: Answer A is incorrect because laws concerning security agreements do not have that
stated limitation.
B: Answer B is correct since preferential transfers include those made within the previous
ninety days while insolvent and include those made for antecedent debts including a
security interest given by a debtor to secure antecedent debts.
C: Answer C is incorrect because security interests given by debtors to secure antecedent
debts may be set aside by the trustee in bankruptcy when given within the previous ninety
days.
D:
Answer D is incorrect because security agreement laws are not limited because the loan
proceeds were used for Roe’s business.
Hint
Think about the timing of the filing.

Q: BANK-0001: Answers

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Wiley CPA Exam Review Online Test Bank Page 1 of 48

Multiple Choice Include:

Garnish the debtor's wages Collect alimony from the debtor

Answer B is correct. When a valid petition in bankruptcy is filed, it acts as an automatic

C: This answer is incorrect. Refer to the correct answer explanation.

The petition acts as an automatic stay to most debts.

If Master's voluntary petition is filed properly,

Answer B is incorrect. The creditors may elect a trustee if they so choose.

Answer D is incorrect. There is no requirement for any creditors to elect a creditors'

committee to consult with the trustee.

The filing of the petition prevents "grab and take."

C. Answer C is incorrect because corporations do not need to first attempt a

D. Answer D is correct because a voluntary bankruptcy proceeding is available to all

Note that this is a voluntary bankruptcy.

Recall rule for fewer than 12 creditors.

Answer D is correct because an involuntary petition in bankruptcy, if not contested, will

An involuntary petition need not be opposed.

Recall property brought back into the estate.

Answer D is incorrect because a bankrupt cannot obtain another voluntary discharge in

Also true of involuntary bankruptcy.

Answer A is incorrect. Involuntary bankruptcy proceedings cannot be commenced against

Under Chapter 7, recall what is covered by the 180-day rule.

Claims and Expenses

Focus on Noll's transaction with Knox.

Answer B is incorrect. Liens are still enforceable against exempt property.

Answer C is correct. The filing of an involuntary petition in bankruptcy stops the

Answer D is incorrect. Security interests in property will still be enforced despite a

The petition stops the enforcement of most debts.

Answer A is incorrect because claims for services rendered by insiders (a director is an

Consider purposes of a corporation.

Social security benefits Disability benefits

unemployment benefit, (2) a veteran's benefit, (3) a disability, illness or unemployment

Recall types of exempt property.

Answer A is incorrect because although the attorney is allowed reasonable compensation,

Answer C is correct because according to the Rules of Bankruptcy Procedure, it is

Courts can control administrative expenses.

The trustee may reject or perform executory contracts.

The trustee generally may assume or reject the lease.

Answer A is incorrect because a trustee is either elected by creditors or appointed by a

Answer B is incorrect because although a trustee will be allowed reasonable compensation

Recall the purpose of the trustee.

Master's payment to Acme could

The creditor already has a perfected security interest.

Answer B is incorrect. A preferential transfer can be made to a general creditor, as well as

Recall the purpose of a preferential transfer.

Answer A is correct. A secured creditor is not an "insider" for the purposes of a

Answer B is incorrect. A partner is an insider with regard to a partnership.

Answer C is incorrect. A director is an insider with regard to a corporation.

Answer D is incorrect. A close relative is an insider with regard to a debtor.

Insiders are generally those close to the business.

On May 1, 2009, 2 months after becoming insolvent, Quick Corp., an appliance

Quick's payment to Kray would

Answer A is correct. An important exception to the trustee's power to avoid preferential

Answer B is incorrect. Kray's knowledge about Quick's insolvency is not relevant.

Recall exceptions to preferential transfers.

Recall reason for preferential transfer.

Answer B is incorrect. A transfer involving a purchase money security interest is an

Recall the priority of secured parties.

Claims and Expenses

Claim by Dart Corp. (one of Knox's suppliers) for computers ordered on

C: This answer is incorrect. Refer to the correct answer explanation.

Calculate the dollar amounts that go to each level of priority.

Recall the priorities.