D216 Business Law for Accountants - Set 3 - Part 2

Correct Answer: Enter the order for relief

In a contested involuntary case, the court enters the order for relief if the debtor is generally not paying its debts as they come due. Acme's failure to pay most bills satisfies that ground, so the case proceeds. Option a is incorrect because a debtor's objection alone does not defeat an involuntary petition. The court still applies the contested test, and because Acme is not paying its debts as they come due, the objection does not require dismissal. Option b is incorrect because Acme is an ordinary corporation, not a farmer or charity. The farmer exemption protects a different kind of debtor entirely, so it offers Acme no shield against this properly supported involuntary petition. Option d is incorrect because the Code never requires every creditor to join. With twelve or more creditors, three qualifying creditors suffice, and Acme already faces three, so demanding all twenty misstates the numeric requirement.

Correct Answer: The automatic stay

The automatic stay springs into effect the instant a petition is filed and suspends almost all creditor litigation and collection. It needs no court order and freezes the status quo so the case can sort out creditors. Option a is incorrect because the order for relief is the court's grant of relief from the duty to pay listed debts. It is a distinct step, whereas the instant freeze on collection at filing is the automatic stay. Option b is incorrect because the means test is an income screen that gatekeeps Chapter 7 and computes disposable income. It decides eligibility and plan funding, not the immediate halt to collection that begins at filing. Option c is incorrect because a cramdown is a Chapter 11 tool letting a court confirm a plan over a dissenting class. It concerns plan approval, not the automatic collection freeze that arises at filing across all bankruptcy chapters.

Correct Answer: Regulatory investigations are a stay exception

A securities-regulator investigation is one of the recognized exceptions to the automatic stay, because that governmental oversight outweighs the debtor's breathing room. Ordinary collection actions like the lawsuit and repossession are stayed, but the regulator's investigation may continue. Option b is incorrect because the stay very much affects lawsuits; it halts most collection litigation the instant a petition is filed. The credit-card suit stopping proves the point, so claiming the stay never touches lawsuits contradicts how it works. Option c is incorrect because a securities investigation proceeds by force of the statutory exception, not by any permission from the debtor. The exception exists precisely so regulators need not seek the debtor's consent to keep investigating. Option d is incorrect because the automatic stay applies across bankruptcy chapters, not Chapter 11 alone. The repossession and lawsuit here are stayed regardless of chapter, so limiting the stay to Chapter 11 misdescribes its broad reach.

Correct Answer: Adequate protection

The adequate-protection doctrine shields secured creditors from losing the value of their security because of the stay. To provide it, the court may order periodic cash payments or replacement collateral so the creditor's interest does not erode. Option a is incorrect because the homestead exemption protects a debtor's home from creditors, serving the debtor rather than a secured lender. It does nothing to preserve collateral value during the stay, which is the concern adequate protection addresses. Option b is incorrect because the means test screens Chapter 7 eligibility and measures disposable income. It has no role in guarding a secured creditor's collateral against decline while the stay is in force, which is a distinct function. Option d is incorrect because the strong-arm power lets a trustee compel others to turn over the debtor's property. That tool gathers assets into the estate; it does not protect a secured lender's collateral from losing value under the stay.

Correct Answer: Yes, an inheritance within the window

Certain after-acquired property, including an inheritance received within one hundred eighty days of filing, is pulled into the estate. The debtor received the inheritance only forty days after filing, well inside that window, so it belongs to the estate. Option a is incorrect because the estate is not limited strictly to property owned at filing. Specific windfalls, such as inheritances arriving within one hundred eighty days, are swept in, so a blanket exclusion of everything received afterward is wrong. Option c is incorrect because inheritances are not automatically exempt; an exemption shields listed categories like a homestead. A near-filing inheritance is instead captured by the after-acquired property rule and brought into the estate for creditors. Option d is incorrect because wages are not the only property the estate can capture after filing. The after-acquired rule expressly reaches gifts, inheritances, divorce settlements, and life-insurance proceeds within the window, so limiting it to wages is inaccurate.

Correct Answer: Avoiding a preference

A preference is a payment that unfairly favored one creditor shortly before filing, and the trustee can avoid it and reclaim the money for equal distribution. The debtor cannot choose which creditors get paid first on the eve of bankruptcy. Option a is incorrect because subrogation is a paying surety's right to step into a creditor's shoes. It concerns a co-signer's recovery after paying a debt, not a trustee undoing a lopsided pre-bankruptcy payment to a favored creditor. Option b is incorrect because adequate protection preserves a secured creditor's collateral value during the stay. It safeguards a lender's security rather than empowering the trustee to claw back a preferential payment made before filing. Option c is incorrect because the homestead exemption shields a debtor's home from creditors. It protects property from seizure and has nothing to do with recovering a payment that unfairly preferred one creditor just before bankruptcy.

Correct Answer: Secured, then unsecured, then the debtor

The distribution order is secured creditors first, out of their collateral, then unsecured creditors from whatever remains, and finally any surplus back to the debtor. This ordering is why the secured versus unsecured distinction matters so much. Option b is incorrect because unsecured creditors do not outrank secured creditors; they stand behind them. Secured creditors are paid first from their collateral, and only what remains reaches unsecured creditors, so this ordering reverses the correct priority. Option c is incorrect because the debtor is paid last, receiving only any surplus after creditors are satisfied. Placing the debtor first inverts the entire scheme, which exists to pay creditors before returning anything to the debtor. Option d is incorrect because the statutory order concerns creditors and the debtor, not paying the trustee ahead of everyone as a distribution class. The tested sequence is secured, then unsecured, then the debtor, which this option scrambles.

Correct Answer: No, banks cannot be Chapter 7 debtors

Banks cannot be Chapter 7 debtors, along with railroads, insurance companies, savings and loan associations, credit unions, and SBA-licensed investment companies. These regulated entities are wound down through their own specialized insolvency regimes rather than Chapter 7. Option a is incorrect because not every business qualifies for Chapter 7. Several regulated entities, including banks and insurers, are specifically excluded, so the claim that any business may file overlooks those statutory carve-outs. Option b is incorrect because banks do not use Chapter 7 at all; they are handled by regulators under separate insolvency law. Saying banks routinely file Chapter 7 contradicts the express exclusion of banks from that chapter. Option d is incorrect because Chapter 7 is open to individuals, partnerships, and corporations, not individuals alone. The reason the bank is barred is its status as a regulated entity, not any rule limiting the chapter to individuals.

Correct Answer: Presumed abuse, pushing him toward Chapter 13

Because Rivera is above median and has disposable income able to pay unsecured debts, the means test raises a presumption of abuse. His Chapter 7 may be barred, and he is funneled toward Chapter 13 to repay creditors over time. Option a is incorrect because the means test does not automatically approve Chapter 7 for an above-median debtor with leftover income. That very profile triggers a presumption of abuse, which threatens dismissal rather than guaranteeing a clean liquidation. Option b is incorrect because the means test screens a debtor's own voluntary filing; it does not generate an involuntary petition by creditors. Its effect on Rivera is a presumption of abuse steering him to Chapter 13. Option c is incorrect because failing the means test does not deny all bankruptcy relief. It chiefly blocks Chapter 7 for able-to-pay debtors and redirects them to Chapter 13 repayment, so Rivera still has a bankruptcy path available.

Correct Answer: Chapter 7

Chapter 7 is liquidation: the trustee sells nonexempt assets, distributes the proceeds, and the debtor is discharged. Because Dana is below median, no presumption of abuse arises, so she is usually allowed to file Chapter 7 for a clean break. Option a is incorrect because Chapter 11 is reorganization, mostly for businesses that keep operating under a plan. Dana wants a quick liquidation of her personal debts, not to run a business through a complex reorganization. Option c is incorrect because Chapter 12 is reserved for family farmers and fishermen who earn most of their income from farming or fishing. Dana is neither, so this specialized repayment chapter is unavailable to her situation. Option d is incorrect because Chapter 13 requires an individual to repay creditors over three to five years rather than liquidate quickly. A below-median debtor seeking the fastest wipeout is generally steered to Chapter 7 instead.

Correct Answer: Chapter 11

Chapter 11 is reorganization, most associated with corporations. The debtor keeps operating, often as a debtor in possession, pays part of its debts under a confirmed plan, and is discharged of the rest, preserving the going concern. Option b is incorrect because Chapter 7 is liquidation, in which a trustee sells the assets and the business ends. Acme wants to keep its plant running under a plan, which is reorganization, the opposite of liquidation. Option c is incorrect because Chapter 13 is limited to individuals with regular income and excludes corporations. Acme is a corporation seeking to reorganize, so it cannot use the individual repayment chapter regardless of its plans. Option d is incorrect because Chapter 12 serves family farmers and fishermen, defined by earning at least half their income from farming or fishing. Acme is a manufacturer, so this narrow agricultural chapter does not apply to its reorganization.

Correct Answer: A debtor in possession

A debtor in possession is a Chapter 11 debtor that keeps operating its own business during reorganization, wielding trustee-like powers such as rejecting burdensome contracts. A separate trustee steps in only for gross mismanagement or the estate's best interest. Option a is incorrect because a garnishee is a third party, like an employer or bank, ordered to turn over a debtor's property. That role appears in garnishment, not in the reorganization where the debtor itself keeps running the business. Option b is incorrect because a surety is a co-signer primarily liable for another's debt. That concept belongs to suretyship, not to a company operating its own affairs in Chapter 11, which is described as a debtor in possession. Option d is incorrect because a guarantor is a co-signer with secondary liability who pays after a default. It has nothing to do with a business managing itself during reorganization, a status captured by the term debtor in possession.

Correct Answer: A cramdown

A cramdown is the court's confirmation of a Chapter 11 plan over a dissenting class's objection, allowed when at least one class accepts and the plan is fair and equitable. It forces a plan on objecting classes. Option a is incorrect because reaffirmation is a debtor's voluntary agreement to keep paying a dischargeable debt to retain collateral. It involves a debtor's choice about one debt, not a court forcing a reorganization plan on a dissenting creditor class. Option b is incorrect because a preference is a pre-bankruptcy payment favoring one creditor that a trustee can avoid. It concerns clawing back transfers, not confirming a reorganization plan over the objection of a class that voted against it. Option c is incorrect because subrogation is a paying surety's right to step into a creditor's shoes. It belongs to suretyship recovery, not to the Chapter 11 mechanism that lets a court confirm a plan despite a class's dissent.

Correct Answer: Chapter 13

Chapter 13 is the individual repayment plan for a person with regular income who owes debts within the limits. The debtor keeps her assets and repays creditors over three to five years, with most remaining debts discharged after the plan. Option b is incorrect because Chapter 7 liquidates nonexempt assets rather than letting the debtor keep property and repay over time. Dana wants to retain her house and car through a payment plan, which is Chapter 13's function. Option c is incorrect because Chapter 11 is a reorganization chapter aimed mostly at businesses and is far more costly and complex. An individual wage earner who simply wants a repayment plan fits the cheaper, simpler Chapter 13 instead. Option d is incorrect because Chapter 12 applies only to family farmers and fishermen earning most of their income from those activities. Dana is a salaried nurse, so the agricultural repayment chapter does not match her circumstances.

Correct Answer: No, Chapter 13 is for individuals only

Chapter 13 is limited to individuals with regular income; partnerships and corporations are excluded. Because the filer is a partnership rather than an individual, it cannot use Chapter 13 and would need a different chapter to reorganize. Option a is incorrect because business entities generally cannot use Chapter 13, which is reserved for individuals. Partnerships and corporations are specifically excluded, so the claim that any business entity may file that chapter is wrong. Option c is incorrect because partnerships have no special entry into Chapter 13; they are among the entities the chapter excludes. Only individuals with regular income qualify, so a partnership must look to another chapter such as Chapter 11. Option d is incorrect because Chapter 13 is not limited to farmers; it is for individuals with regular income. Farmers and fishermen have their own Chapter 12, so tying Chapter 13 eligibility to farming misstates who may file.

Correct Answer: Chapter 12

Chapter 12 is the specialized repayment chapter for family farmers and family fishermen, defined by deriving at least half of income from farming or fishing. It works like a tailored version of Chapter 13 for seasonal operations. Option a is incorrect because Chapter 7 is liquidation, selling assets and ending the operation rather than providing a tailored repayment plan. A family fisherman seeking a repayment chapter fitted to seasonal income uses Chapter 12 instead. Option b is incorrect because Chapter 11 is a general business reorganization chapter, more complex and not specifically shaped for fishing operations. The Code provides Chapter 12 precisely to serve family fishermen with their seasonal, weather-dependent income. Option d is incorrect because Chapter 13, though a repayment chapter for individuals, is not the one tailored to fishermen. The Code carves out Chapter 12 specifically for those earning at least half their income from farming or fishing.

Correct Answer: The child-support arrears

Domestic-support obligations such as child support are nondischargeable and survive bankruptcy. Ordinary unsecured debts like the credit-card balance and medical bill are wiped out, but Rivera still owes the past-due child support after his discharge. Option a is incorrect because an ordinary credit-card balance is a general unsecured debt that a discharge eliminates. It carries none of the policy concerns that make support obligations survive, so it does not remain owed after bankruptcy. Option b is incorrect because a routine medical bill is dischargeable like other unsecured debts. Nothing about a medical bill makes it survive a discharge, unlike child support, which policy singles out as nondischargeable. Option c is incorrect because an unsecured signature loan is exactly the kind of debt a discharge wipes out. It is not among the protected categories, so it disappears while the child-support arrears remain enforceable against Rivera.

Correct Answer: Nondischargeable unless the debtor proves undue hardship

Student loans are presumptively nondischargeable and are wiped out only if the debtor proves undue hardship. Because this debtor made no such showing, his student loans survive the Chapter 7 discharge and remain fully owed after the case. Option b is incorrect because student loans are not automatically discharged in Chapter 7. They survive unless the debtor makes a demanding undue-hardship showing, so treating them as routinely wiped out misstates their special protected status. Option c is incorrect because student loans can be affected by bankruptcy; they are discharged when undue hardship is proven. Saying they are never touched ignores that narrow but real path to discharge available to some debtors. Option d is incorrect because the student-loan rule does not hinge on choosing Chapter 11. Discharge depends on proving undue hardship, not on the chapter, so limiting relief to Chapter 11 misdescribes how student loans are handled.

Correct Answer: A denial of discharge

Denial of discharge refuses the debtor's entire discharge, so no debts are wiped out. Fraudulently concealing assets is a classic ground for this harsh result, which is far broader than merely holding a single debt nondischargeable. Option a is incorrect because a nondischargeable debt is only one particular debt that survives while the rest are discharged. Here the court refuses the whole discharge, so nothing is wiped out, which is denial instead. Option b is incorrect because reaffirmation is a debtor's voluntary agreement to keep paying a dischargeable debt to retain collateral. It is a chosen commitment on one debt, not a court's refusal to grant any discharge for concealing assets. Option d is incorrect because revocation takes back a discharge that was already granted, within one year of discovering fraud. On these facts the court refuses the discharge from the outset, which is a denial, not revocation.

Correct Answer: A reaffirmation

A reaffirmation is an agreement to voluntarily repay a dischargeable debt, typically so the debtor can keep collateral like a car or house. Rivera reaffirms the car loan to retain the vehicle, and the court reviews it before approval. Option a is incorrect because a cramdown is a Chapter 11 court power to confirm a plan over a dissenting class. Rivera is an individual choosing to keep paying one loan, which the law calls reaffirmation instead. Option c is incorrect because a preference is a pre-bankruptcy payment favoring one creditor that a trustee can avoid. Rivera is not clawing anything back; he is voluntarily agreeing to keep paying a debt to hold onto his car. Option d is incorrect because a workout is a formal contract restructuring a mortgage to avoid foreclosure. Rivera is inside a Chapter 7 case agreeing to keep paying a car loan to keep the collateral, which the law calls reaffirmation.