Question

Claims to Funds. Paul had a great job as a bank executive. Unfortunately, his bank came under scrutiny by federal regulators and while 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 debtors 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 parties has first claim to proceeds from the house?
a. The bank with the security interest. Suzy. Sam.
b. Suzy and Sam with each having a 50% interest.
c. The bank, Suzy, and Sam with each having a 1/3 interest.

Answer 1

Answer: the bank with security interest.

Explanation:

The federal bankruptcy exemptions are list of exemptions which are available to bankruptcy filers. The bankruptcy exemptions determine what an individual is allowed to keep during and after the Chapter 7 bankruptcy.

Since the federal bankruptcy exemption is applicable to Paul's case, the party who has the first claim to proceeds from the house is the bank with security interest.

Suzy and Sam will not have the first claim to proceeds from the house, because the house is under mortagage and the bank gets the first right to take over the house during bankruptcy.