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Bankruptcy, student loans and sole proprietorships

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Answer the questions in Scenario 1 and then select ONE of the other two Scenarios. It is not necessary to copy the case study into the paper. Label the beginning of each case study with the number you selected (e.g. Scenario 1). Cite your sources in APA format on a separate page

Scenario 1: Bankruptcy
Celia graduated from a prestigious law school two years ago. Celia's parents did not have the resources to help her pay for college. For the past seven years, Celia accumulated almost $150,000 in debt for student loans for her undergraduate and law degrees.

After graduation, Celia opened her own jury consulting business as a sole proprietor. Her new business was not doing well. Celia earned approximately $35,000 after her business expenses were paid. Remembering her class in bankruptcy from law school, Celia believed that if she filed a voluntary Chapter 7 petition that all of her debts would be discharged and she could start over.
- Is Celia entitled to file for Chapter 7 bankruptcy? Why or why not?
- Assume Celia is eligible to file Chapter 7. Will the credit card debt and student loans be discharged? Why or why not?

On May 1, Celia filed for Chapter 7 bankruptcy. At that time and for at least four months prior to that time, she was unable to pay all of her current obligations. On March 15, Celia paid the following expenses: her monthly personal credit card payment, her home mortgage, the rent for her consulting office, and the electric bill for both her business and her home.
- The trustee in bankruptcy claimed that some of these payments were voidable preferences. Is the trustee correct? If so, which payment(s) is a voidable preference and why?

Scenario 2: Property
Frankie Smith age 12, lived with his mother, Vanessa Smith, in a rental house next to a farm owned by Daphne and Brandon Brown. On the back of the farm property was a small creek that had good fishing, but there were deadly piranha in the waters. Frankie would often sneak onto the farm property to fish. One day, while fishing on the farm, he was bitten by a piranha and severely injured. While running to help her son on the farm property, Vanessa tripped on a wire and broke her leg. The Smiths sued the Browns for their injuries.
- Explain whether the Browns owe a duty of care to Frankie and Vanessa.

Scenario 3: Insurance
When Beth Simpson applied for a $250,000 life insurance policy with Meridian Insurance Co., she stated on the application that she had not seen a physician within the last three years. She, in fact, had seen a physician regularly. In fact, one month prior to the application Beth had seen her physician, who diagnosed her with fibromyalgia. Her response to the drug use question was that she was not a user of drugs, but, in fact, she regularly smoked marijuana because it eased the symptom of fibromyalgia. Beth died within the two-year contestability period and Meridian refused to pay. The beneficiary to the policy, Philip Simpson, contends all premiums were paid in full and any misstatements were unintentional. Meridian contends that if the deceased had given the facts, the policy would not have been issued.
- Based upon a discussion of your understanding of insurance law principles, should Philip Simpson recover on this policy? Why or why not?

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Scenario 1: Bankruptcy
Celia has fallen into the trap that many students fall into, accumulating large amounts of debt that are hard to repay. Student loans can really add up, and the interest can be merciless, none the less as Celia contemplates chapter 7 bankruptcy as a sole proprietor, she needs to know a couple of things. First, she needs to understand that she can file bankruptcy on both her personal debts and her business debts as a sole proprietor of her own company. Second, she needs to understand that not all her debts are considered business debts.
Credit card debt can be totally wiped ...

Solution Summary

Bankruptcy, student loans and sole proprietorships are discussed.

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Chapter 7 Bankruptcy

During the decade of the 1990s, business and personal bankruptcies soared. This happened in spite of the greatest economic boom in US history. It was also a boom time for lawyers specializing in the intricacies of bankruptcy law. In 1998, a record 1.4 million businesses and individuals filed for protection under the bankruptcy code, a 300 percent increase since 1980. Ninety-six percent of the filings were personal bankruptcies; however, in 1999, the number dropped 8.5 percent.

Many analysts attribute the high number of bankruptcies to aggressive credit offers by banks and, to a lesser extent, department stores. These companies lure even the most credit challenged (young people and those who have problems managing money) into accepting their credit cards, sometimes offering secured lines of credit, where the cardholder places as little as $100 in a savings account and receives a line of credit five times that amount.

Another reason cited by analysts for the increase is that the old stigma associated with bankruptcy-if you filed for bankruptcy protection, you were somehow inferior and to be looked down upon-no longer exists in most areas of the country. A third reason is a change in attitude of the credit cards issuers. Not long ago, if an individual filed for bankruptcy, that person was unable to obtain credit for years (a bankruptcy filing remains on your Credit Bureau file for 10 years). Today, however, credit card companies operate on a different premise. If you have recently filed for bankruptcy, you are no longer in debt. Therefore, you must have sufficient cash flow to service new debt. Within a month of filing, your mailbox will be flooded with credit card offers.

In the business arena, filing for bankruptcy-stopping creditors from taking legal action-has evolved into just another business strategy.

The three most common types of bankruptcy are:

Chapter 7: The bankrupt's assets are sold to pay creditors, and creditors have no right to the debtor's future earnings.

Chapter 11: A business continues to operate and creditors receive a portion of both current assets and future earnings. This form of bankruptcy is also available to wealthy individuals. (See Wards.com)

Chapter 13: For the typical consumer, where creditors usually receive a portion of the individual's current assets and future earnings. Although bankruptcy laws are sometimes abused (an individual may file personal bankruptcy every seven years and some individuals do exactly that), bankruptcy is designed as a safety net for businesses or individuals who experience financial difficulties for whatever reason.

QUESTIONS:

Who may file Chapter 7 bankruptcy? How has this changed over the past year?

What are some of the reasons people file bankruptcy?

How does bankruptcy affect interest rates on loans? Credit cards?

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