Question

Claims to Funds. Paul had a great job as a bank executive. Unfortunately, his bank came under scrutiny by federal regulators, and although Paul had done nothing illegal, he ended up being fired. Unfortunately for Paul, he had a number of debts. Among his assets were a house worth $250,000 on which he owed $150,000 to a bank that held a security interest; three vehicles; an expensive watch worth $5,000; and $120,000 in an Individual Retirement Account "IRA". He owed $900 per month in child support to his ex-wife Suzy and was behind on payments in the amount of $1,800. He also owed $2,000 in wages consisting of four months of back pay to Bob who took care of Paul's landscaping needs and swimming pool care. Unable to find a job and believing that he had no other option, Paul filed for Chapter 7 bankruptcy. All creditors angrily demanded payment from liquidation of Paul's assets. Paul, on the other hand, claims that he needs all the above-mentioned assets and that he should not have to give up anything. Only federal bankruptcy exemptions apply to Paul's case. Which of the following is true regarding Suzy’s and Bob’s claims as unsecured creditors?

a. Bob's claims have priority.
b. Bob's claims have priority only up to $1,000; after that amount, Suzy and Bob will receive the same percentage of funds.
c. Suzy and Bob will receive the same percentage of funds.
d. Suzy's claims have priority.
e. Suzy's claims have priority only up to $1,000; after that amount, Suzy and Bob will receive the same percentage of funds.

Answer 1

Claims to Funds (Paul)

The true statement regarding Suzy's and Bob's claims as unsecured creditors is:

d. Suzy's claims have priority.

Step-by-step explanation:

a) Data and Calculations:

Personal assets:

House worth $250,000

Three vehicles

Expensive watch worth $5,000

Individual Retirement Account = $120,000

Personal obligations:

Mortgage on house = $150,000

Child support arrears = $1,800 (for two months)

Wages payable to Bob = $2,000

b) The reason for Suzy's claims having priority over Bob's unpaid wages is that Suzy's claims are for child support. In Chapter 7 and Chapter 13 bankruptcies, child support debts have priority over other debts. In addition, they are not dischargeable in bankruptcy. This implies that the affected parent will continue to provide the mandated support. Providing for minor children is legally recognized throughout the U.S. state and federal court systems.