CPA Exam — REG (Regulation)Business LawHard
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 has two unsecured creditors: Creditor A is owed $60,000, and Creditor B is owed $30,000. After administrative expenses of $5,000 and priority claims of $10,000 are paid from the sale of the car, how much will Creditor B receive from the remaining proceeds?
- A$10,000
- B$20,000
- C$30,000
- D$15,000
Show answer & explanationAnswer & explanation
Correct answer: B. $20,000
First, calculate the net proceeds available for distribution to unsecured creditors: $75,000 (car value) - $5,000 (administrative expenses) - $10,000 (priority claims) = $60,000. Next, calculate the total unsecured claims: $60,000 (Creditor A) + $30,000 (Creditor B) = $90,000. Creditor B's share is ($30,000 / $90,000) * $60,000 = (1/3) * $60,000 = $20,000.
Why the other options are wrong
- A. This amount is too low and does not reflect the pro rata distribution based on their claim amount.
- C. This would be the amount if there were enough funds to pay Creditor B in full, which is not the case here.
- D. This would be the amount if Creditor B received half of the remaining funds, implying equal claims, which is incorrect.
Chapter 7 Distribution Priority
The order in which a debtor's assets are distributed to creditors in a Chapter 7 bankruptcy, following a strict hierarchy established by the Bankruptcy Code.
- Secured creditors are paid first from their collateral.
- Unsecured claims are paid in a specific order of priority classes.
- General unsecured claims are paid last, pro rata if funds are insufficient.
- Debtor receives any surplus after all claims are paid.
Memory trick: SECURED-PRIORITY-GENERAL-DEBTOR: The Order of Payment.