J&J Inc. declared bankruptcy through a Chapter 7 filing. Consider the following data in millions of dollars and determine the funds available for secured creditors.
-Proceeds from the liquidation of assets = $130
-First mortgage = $100
-Administration expenses associated with the bankruptcy = $3
-Notes payable to the banks = $25
-Subordinated debentures = $5
-Taxes due to federal, state, and other governmental agencies = $1
-Wages due employees (8,500 employees) = $18
A) $79
B) $84
C) $109
D) $0

Question

Quizplus · Accepted Answer

In a Chapter 7 bankruptcy, proceeds from the liquidation of assets are first used to cover administration expenses and then to pay secured creditors. Here, the liquidation proceeds are $130 million, and the administration expenses are $3 million, leaving $127 million. The first mortgage, a secured debt, is $100 million. Therefore, after paying the $100 million for the first mortgage, $27 million remains, which is not a choice provided, indicating a misunderstanding in the distribution process. However, considering the priority of payments and the given options, the correct calculation for funds available specifically for secured creditors (first mortgage in this scenario) directly after administration expenses would indeed prioritize the $100 million mortgage. The misunderstanding seems to be in the interpretation of the remaining funds, which are not directly available to secured creditors but are instead used to pay other claims. The correct answer, based on the priority of claims and the information provided, should reflect the amount secured creditors receive directly, which is the full amount of their secured claim ($100 million) after administrative expenses. However, given the options and the question's focus, the closest correct interpretation of funds directly available for secured creditors after administrative expenses would be the total amount they are entitled to before considering other unsecured claims, which seems to have been the intended point of inquiry.

J&J Inc Declared Bankruptcy Through a Chapter 7 Filing