CPA Exam — REG (Regulation)Business LawMedium
A debtor files for Chapter 7 bankruptcy. Among the debtor's assets is a fully paid-for, non-exempt classic car valued at $75,000. The debtor also has unsecured debts totaling $100,000. The bankruptcy trustee sells the car. After administrative expenses of $5,000 are paid, how much will be distributed to the unsecured creditors from the sale of this car?
- A$65,000
- B$75,000
- C$100,000
- D$70,000
Show answer & explanationAnswer & explanation
Correct answer: D. $70,000
In a Chapter 7 bankruptcy, the trustee liquidates non-exempt assets. The proceeds are then distributed according to a statutory priority. Administrative expenses are paid first. From the $75,000 sale, $5,000 goes to administrative expenses, leaving $70,000 for the unsecured creditors. The total unsecured debt of $100,000 is irrelevant to the amount distributed from this specific asset, as they will only receive what's available.
Why the other options are wrong
- A. This subtracts too much; only administrative expenses are deducted before unsecured creditors.
- B. This ignores the administrative expenses, which are paid first.
- C. The unsecured creditors will only receive what is available from the liquidation, not the full amount of their debt if the assets are insufficient.
Chapter 7 Distribution Priority
The statutory order in which proceeds from the liquidation of a debtor's estate are distributed to various claimants in a Chapter 7 bankruptcy.
- Secured creditors are paid first from their collateral.
- Administrative expenses have highest priority among unsecured claims.
- Priority claims (e.g., certain taxes, wages) are paid before general unsecured claims.
- General unsecured creditors are paid last, typically pro rata if funds are insufficient.
Memory trick: S-A-P-G: Secured, Admin, Priority, General.