The creditors of a firm have filed an involuntary petition seeking a Chapter 7 liquidation of the firm under federal bankruptcy law. The firm contests the petition. What is a basis for the court denying the petition?
Answer (D) is correct. An involuntary petition must be joined by three or more creditors with unsecured claims totaling at least $15,325 if the debtor has 12 or more creditors. If there are fewer than 12, one creditor with a claim of at least $15,325 may file.
The correct priority of claims in a bankruptcy liquidation is
Answer (A) is correct. After secured creditors receive the proceeds of the sale of specific collateral, the other assets are distributed according to the following scheme: (1) administrative expenses, (2) claims of gap creditors, (3) wages of no more than $12,475, (4) unpaid contributions to employee benefit plans, (5) customer deposits, (6) taxes, (7) certain unfunded pension plan liabilities, (8) claims of general or unsecured
creditors, (9) claims of preferred shareholders, and (10) claims of common shareholders.
A discharge in bankruptcy under Chapter 7 (liquidation) may be obtained by a(n)
Answer (C) is correct. Individual debtors may receive a discharge under Chapter 7 from most debts that remain unpaid after distribution of the debtor’s estate. However, corporations and partnerships are merely liquidated. They are not eligible for a Chapter 7 discharge.
Chapter 11 of the bankruptcy law concerns reorganizations. Under Chapter 11,
Answer (D) is correct. A Chapter 11 reorganization allows a distressed business enterprise to restructure its finances. The primary purpose of the restructuring is usually the continuation of the business. Reorganization is a process of negotiation whereby the debtor firm and its creditors develop a plan for the adjustment and discharge of debts.
Which of the following is a true statement about a plan of reorganization in a Chapter 11
Answer (A) is correct. The debtor has the exclusive right to file a plan during the 120 days after the order for relief is issued by the court, unless a trustee has been appointed, and may file a plan of reorganization at any time.
The trusteeship function in a Chapter 11 bankruptcy reorganization is usually performed by the
Answer (B) is correct. In a Chapter 11 reorganization, the court has limited power to appoint a trustee. Instead, to better accomplish the rehabilitative aspirations of a reorganization, a firm seeking protection under Chapter 11 may be permitted to operate its own business as a debtor-in-possession. A strong presumption exists that a debtor-in-possession should be permitted to continue to operate the business unless there is evidence of incompetence or mismanagement on the part of the debtor. A debtor-in-possession has basically all the same rights and duties as a trustee but does not receive special compensation for performing the function.
A firm is being liquidated several months after its Chapter 7 bankruptcy filing. The receiver has compiled the following information.
Common shares (at par) 22,000
Preferred shares (at par) 5,000
Secured bonds 50,000
Senior unsecured debt 27,000
Junior unsecured debt 18,000
Wage payable 7,000
Taxes owed 3,000
Credit from suppliers since filing 2,000
Court/trustee costs 1,500
Based on this information, what percentage of their claims will junior creditors receive?
Answer (A) is correct. Before the junior creditors are paid, secured bonds, court/trustee costs, credit from suppliers since filing, wages payable, taxes owed, and senior creditors must all be paid (in that order). After all of these debts are paid, the firm is left with $9,500 ($100,000 – $50,000 – $1,500 – $2,000 – $7,000 – $3,000 – $27,000) that the junior creditor is entitled to. The junior creditors will receive 53% of their claims ($9,500 ÷ $18,000). Please note that shareholders are last in line to the claims.
A company in financial distress is often faced with filing for either liquidation or reorganization. While each type of filing offers unsecured creditors some benefits, junior creditors are more likely to favor
Answer (A) is correct. Junior creditors likely favor reorganization in hopes of recovering a larger portion of debt than they would receive after higher ranked creditors’ claims are satisfied through liquidation. They speculate that the firm’s financial condition can improve.