Deck 24: Debtor-Creditor Relations and Bankruptcy

Question 1

In order to avoid a bankruptcy proceeding,the parties often try to negotiate an out-of-court settlement-called a workout-that restructures the debtor's financial affairs.

Answer 1

True

Question 2

A creditor's claim in bankruptcy may be involuntarily postponed through application of the doctrine of equitable subordination.

Answer 2

True

Question 3

In order to reflect the greater risk to the lender,secured loans are priced at a higher rate than unsecured loans.

Answer 3

False

Question 4

In a composition plan under Chapter 13,the creditor receives a percentage of the debt owed and the remaining amount is discharged.

Question 5

A repayment plan under a Chapter 11 bankruptcy must either be accepted unanimously or pass the "best interests of creditors" test.

Question 6

A debt subordination is an agreement whereby one or more creditors of a common debtor agree to defer payment of their claims until the debtor is solvent again.

Question 7

Commercial paper is a term that describes short-term corporate indebtedness.

Question 8

If a borrower fails to repay a secured loan,the lender,may foreclose on the collateral.

Question 9

A revolving loan is based upon the continuous extension of credit of unlimited amount.

Question 10

Agreements for term or revolving loans may call for mandatory prepayment when certain events occur.

Question 11

A commitment to make a loan must always be in writing.

Question 12

After-acquired property is property that the debtor acquires after the repayment of a loan under a security agreement.

Question 13

Transnational insolvency involves an insolvency proceeding in one country with a creditor located in a second country.

Question 14

National banks acting as lenders are subject to state usury laws.

Question 15

The debtor-in-possession must honor all prebankruptcy executory contracts.

Question 16

Under a guaranty of collection,the guarantor becomes obliged to pay only after the lender has attempted unsuccessfully to collect the amount due from the primary debtor.

Question 17

The UCC provides that,unless otherwise agreed,a security agreement gives the secured party a security interest in the proceeds if collateral is sold,exchanged,collected,or otherwise disposed of.

Question 18

Chapter 13 does not provide a bankruptcy discharge for corporations.

Question 19

Payments in the ordinary course of business made within 90 days prior to a Chapter 11 bankruptcy filing are voidable as a preference.

Question 20

A commitment fee is an amount a lender requires as consideration for its promise to keep a commitment to loan available.

Question 21

A(n)________ loan is paid off over a period of time.

A)collateral
B)amortized
C)participating
D)revolving

Question 22

A ________ loan is one in which the original lender sells shares to other parties.

A)master
B)syndicated
C)participation
D)attached

Question 23

Requirements that must be met under the loan agreement before the lender's obligations arise are known as ________.

A)conditions precedent
B)conditions concurrent
C)conditions subsequent
D)loan qualifiers

Question 24

The ________ interest rate is based on the cost of borrowing offshore U.S.dollars in the global interbank market.

A)International Rate Exchange
B)Frankfurt International Trade Rate
C)London Interbank Offered Rate
D)New York Exchange Rate

Question 25

A(n)________ clause in a loan document provides that any breach by the borrower under any other loan agreement constitutes an event of default.

A)attached
B)dragnet
C)cross-default
D)cross collateralization

Question 26

A bank's ________ rate is the lowest published rate of interest at which the bank lends to its best and most creditworthy commercial customers.

A)lien
B)term
C)prime
D)secured

Question 27

Interest is generally computed on a ________ basis.

A)yearly
B)monthly
C)weekly
D)daily

Question 28

A ________ interest rate fluctuates throughout the life of the loan according to the interest rate that the lender would pay if it borrowed the funds in order to relend them.

A)fixed
B)principal
C)base
D)floating

Question 29

A bankruptcy plan that reduces the amount payable to all creditors is known as a ________ plan.

A)composition
B)reduction
C)repayment
D)none of the above

Question 30

Congress is given the power to enact bankruptcy laws by

A)a delegation of authority by the President.
B)the U.S.Constitution.
C)rulings of the Supreme Court.
D)inherent powers under federalism.

Question 31

________ is the coercion of the borrower by threatening to do an unlawful act that might injure the borrower's business or property.

A)Financial blackmail
B)Economic duress
C)Monetary extortion
D)None of the above.

Question 32

In order to arrive at an actual interest rate,a ________ is an amount added to the bank's theoretical cost of obtain funds to lend.

A)spread
B)base
C)reference
D)security

Question 33

In a ________ loan,more than one lender enters into concurrent direct obligations with the borrower to make the loan.

A)participation
B)term sheet
C)syndicated
D)none of the above

Question 34

A(n)________ guaranty is enforceable only with respect to a specified transaction or series of transactions.

A)attached
B)upstream
C)restricted
D)payment

Question 35

In a Chapter 11 proceeding,after the first 120 days from the date of the order for relief,________ may propose a plan.

A)only the debtor
B)only the creditor
C)either the creditor or the debtor
D)only the court

Question 36

When a bank has failed,federal banking agencies have used a doctrine called ________ to avoid certain debts that would ordinarily be valid against the bank.

A)proof of claim
B)events of default
C)D'Oench,Duhme
D)one form of action

Question 37

An equipment lease that serves the purpose of financing is known as a(n)________ lease.

A)finance
B)temporary
C)lending
D)debtor's

Question 38

________ in the loan documents typically require the borrower to maintain its corporate existence,pay taxes,maintain insurance,and comply with applicable laws.

A)Affirmative covenants
B)Negative covenants
C)Security agreements
D)Security interests

Question 39

A ________ is an agreement whereby one or more creditors of a common debtor agree to defer payment of their claims until another creditor of the same debtor is fully paid.

A)participation loan
B)cross-collateralization
C)debt subordination
D)lien subordination

Question 40

________ a security interest means that it is made valid as against other creditors of the debtor.

A)Finalizing
B)Perfecting
C)Organizing
D)Signing

Question 41

Fact pattern 24-1
Bailey has been making large credit card purchases for months.He has also borrowed money from his Jack and Susan who are friends of his so that he can continue his rather lavish lifestyle.He borrowed $1,000 from Jack and $2,000 from Susan.He also borrowed $500 from his mother.Bailey finally decides that he can no longer continue to make even the minimum payments on his credit card and starts to consider filing for bankruptcy.He does,however,want to pay some of his debts.He starts the New Year off by paying his mother off on January 1.Then,on June 1 he pays Jack; and on July 4,he pays Susan.Bailey proceeds to file bankruptcy on August 1 because he has repaid anyone he really cares about.He plans to complete the bankruptcy and move to the Caribbean.
Refer to fact pattern 24-1.Which of the following is true regarding the repayment of the loan to Bailey's mother?

A)It will be considered a preference because Bailey's mother would be considered an insider,and it was made within one year of the filing for bankruptcy.
B)Although Bailey's mother would not be considered an insider,the payment would be considered a preference because it was made within one year of the filing for bankruptcy.
C)The filing will be considered a preference only if Bailey and his mother had an agreement that she would advance the amounts to him again once the bankruptcy was completed.
D)The payment would not be considered a preference because it was not made within 30 days of the filing for bankruptcy.

Question 42

Matthew has filed for Chapter 7 bankruptcy relief.He had borrowed money from his best friend,Rick,for the purchase of a car.Matthew really wants to repay Rick,but does not want to jeopardize his bankruptcy relief and the discharge of a number of other debts.What option,if any,is open to Matthew?

A)No options are open to Matthew because any payment to Rick would be considered a voidable preference.
B)Matthew can reaffirm the debt to Rick,and the bankruptcy judge has no authority to interfere in that decision.
C)Matthew can reaffirm the debt to Rick,but the bankruptcy judge has the authority to disapprove of the agreement if the court finds that it is not in Matthew's best interest.
D)Matthew can reaffirm the debt to Rick but only up to 50% of the maximum amount owed,and the bankruptcy judge has the authority to disapprove of the agreement if the court finds that it is not in Matthew's best interest.

Question 43

Zane has been living above his means for many months.He has run up thousands of dollars in credit card charges.Zane is strongly considering bankruptcy but he wants to hide away some cash first.Therefore,he sells to his best friend Kate at a substantial discount a number of things he bought including golf clubs,jewelry,and electronics.Kate had no idea that Zane was contemplating bankruptcy and just thought that Zane was getting rid of some things he did not want.Four months later,Zane files and is allowed to proceed under a Chapter 7 bankruptcy.Mick,who knew that Zane had filed for bankruptcy,overhears Kate bragging about how much she was enjoying Zane's stuff that she got at a significant discount,and he notifies the bankruptcy judge.Which of the following is true regarding Kate's situation?

A)Kate will be allowed to keep the items because regardless of what she paid,she purchased them over 90 days before Zane filed for bankruptcy protection.
B)Kate will be allowed to keep the items if she paid at least 50% of the market value for them.
C)Under these facts,Kate will be allowed to keep the items if she paid at least 70% of the market value for them.
D)Because this is a fraudulent transfer,Kate will not be able to keep the items.

Question 44

Explain the scope and purpose of Article 9 of the UCC.Define the terms security interest,dragnet clause,and perfection.What are the methods of perfecting a security interest under Article 9?

Question 45

In a ________ loan,the lender may require the entire principal to be repaid in one lump sum upon maturity or in equal or unequal installments.

A)revolving
B)term
C)rate
D)amortized

Question 46

What is a guaranty? Define and explain the difference between a guaranty of payment and a guaranty of collection.

Question 47

Fact pattern 24-1
Bailey has been making large credit card purchases for months.He has also borrowed money from his Jack and Susan who are friends of his so that he can continue his rather lavish lifestyle.He borrowed $1,000 from Jack and $2,000 from Susan.He also borrowed $500 from his mother.Bailey finally decides that he can no longer continue to make even the minimum payments on his credit card and starts to consider filing for bankruptcy.He does,however,want to pay some of his debts.He starts the New Year off by paying his mother off on January 1.Then,on June 1 he pays Jack; and on July 4,he pays Susan.Bailey proceeds to file bankruptcy on August 1 because he has repaid anyone he really cares about.He plans to complete the bankruptcy and move to the Caribbean.
Refer to fact pattern 24-1.Which of the following is true regarding the repayment of the loans from Jack and Susan?

A)The payment to Susan would be considered a preference because it was made within 30 days of the filing for bankruptcy,but the payment to Jack would not be considered a preference because it was made more than 30 days prior to the bankruptcy filing.
B)Payments to both Jack and Susan would be considered preferences because they were made within 90 days of the filing for bankruptcy.
C)Payments to both Jack and Susan would be considered preferences because Jack and Susan are insiders,and the payments were made within one year of the bankruptcy filing.
D)The payments would not be considered preferences.

Question 48

In a ________ bankruptcy under Chapter 11,the debtor solicits votes on its plan of reorganization and only files for Chapter 11 protection after it has obtained the required votes in favor of the plan.

A)preapproved
B)preplanned
C)prepackaged
D)prenegotiated

Question 49

A ________ loan may be repaid form time to time at the borrower's discretion,subject to a final maturity date when all sums outstanding become due and payable.

A)revolving
B)term
C)rate
D)amortized

Question 50

What is a preference under the bankruptcy code? What time period is reviewed to determine if a preference has occurred? When does a long-term debt payment to a bank qualify under the ordinary course of business exception?

Question 51

Under a guaranty of ________,the guarantor's obligation to pay the lender is triggered automatically when the debtor fails to make a payment when due.

A)security
B)collection
C)payment
D)performance

Question 52

A Chapter 7 discharge is not available to a debtor who has received a discharge in a bankruptcy filed in the preceding ____ years.

A)two
B)six
C)eight
D)seven

Question 53

A loan backed up by collateral is knows as a(n)________ loan.

A)principal
B)guaranteed
C)secured
D)amortized

Question 54

Molly got in over her head with credit card debt.She has been receiving phone call after phone call from creditors.She has also received notification from several creditors regarding lawsuits being filed against her.Her mailbox is filled with demands for payment each day.Molly regrets her excessive spending.She wants to pay as much as she can,but she is tired of the pressure from creditors.Is any option open to her?

A)Yes,the automatic stay that would be available upon a bankruptcy filing.
B)No,Molly got herself into this mess; and she will have to put up with demands from creditors even if she files for bankruptcy.
C)If Molly is allowed to file for Chapter 7 relied,an automatic stay will prevent the pressure from creditors; but if she proceeds under Chapter 13,the demands will continue.
D)If Molly is allowed to file for Chapter 7 relied,an automatic stay will prevent the pressure from creditors; but if she proceeds under Chapter 13,the demands will continue.

Question 55

Rhonda purchases a refrigerator from AA Appliance Store.She store sells the refrigerator to her on credit.A few months later,Rhonda decides to move in with a friend and sells the refrigerator to Sally for $50.She also stops making payments on the refrigerator.When a representative from AA Appliance Store calls Rhonda,she tells them to get lost,that she has no money,and that the refrigerator is at Sally's house.The refrigerator is now worth less than Rhonda owes on it.Which of the following is true regarding the store's rights,if any,against Sally?

A)Because the sale to Rhonda created a purchase-money security interest,the store may repossess the refrigerator from Sally.
B)The store may only repossess the refrigerator from Sally if the store filed a financing statement reflecting its interest.
C)The store may not repossess the refrigerator from Sally under any circumstances because it is a consumer good.
D)The store may only repossess the refrigerator from Sally if it can be established that Sally knew that Rhonda owed money on it.

Question 56

A law that limits the maximum rate of interest that may be charged is called a(n)________ law.

A)interest
B)usury
C)rate
D)term

Question 57

Which of the following is true regarding when a company enters the "zone of insolvency"?

A)There is no clear test or definition for the "zone of insolvency."
B)Under legal terms,a company enters the "zone of insolvency" when it files a "suggestion of corporate insecurity".
C)Under legal terms,a company enters the "zone of insolvency" when it has an excess of liabilities over the value of its assets.
D)Under legal terms,a company enters the "zone of insolvency" only when it is declared bankrupt.

Question 58

What is required in a filing for a voluntary petition in bankruptcy? An involuntary petition?

Question 59

A purchase-money security interest in a consumer goods loan is perfected

A)automatically.
B)by possession.
C)by filing.
D)all of the responses are correct.

Question 60

An individual may file for federal bankruptcy protection under

A)Chapter 7
B)Chapter 11
C)Chapter 13
D)All of the responses are correct

Question 61

Discuss the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA")in regards to whether Chapter 7 or Chapter 13 relief is appropriate.

Question 62

Several commentators have criticized the Bankruptcy Code as too easily excusing individuals and businesses from honoring their lawful obligations.From a societal standpoint,do you believe that the Bankruptcy Code plays a positive role in social and economic relationships? What changes,if any,would you recommend?