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SAMPLE CHAPTER 7 CASE AND
ILLUSTRATIVE FORMS 1, 2, AND 3
Sam Martin, dba Martin Cards, filed bankruptcy on November 20, 1996, in a non-community property state and Jenny Ward ("Ward") was appointed the chapter 7 trustee. Ward's semi-annual reporting period ends June 30, 1997. Ward submitted the attached Forms 1 and 2 showing the activity in the case from November 20, 1996, through June 30, 1997. This is the second reporting period for this case.
Ward obtained the following information regarding the Debtor's assets from an analysis of the petition, schedules and statement of financial affairs, the Debtor's testimony at the § 341(a) meeting, and information received from creditors and other parties-in-interest.
Checking Account (Asset #1) - Debtor listed a checking account balance of $500 in Schedule B. Cash is not exempt in the state in which the Debtor filed bankruptcy. Ward recovers the $500 on December 10, 1996. Ward then promptly obtains a federal tax identification number, opens an estate checking account, and deposits the $500 into the account.
123 Ocean View - Rental Property (Asset #2) and Ocean View Rent Receivable (Asset #8) - Debtor listed a rental house located at 123 Ocean View in Schedule A valued at $100,000 encumbered by a valid and perfected lien securing a debt of $30,000. At the time the petition was filed on November 20, 1996, the Debtor had not yet received the November rent in the amount of $500 from the tenant, Steve James. The Debtor listed the $500 as rent receivable in Schedule B.
Ward determines the value of the rental property to be $63,000 ($100,000 scheduled value minus $30,000 lien minus $7,000 (7%) for estimated costs of sale, including realtor's commission, taxes and closing costs). Ward records this amount in Form 1, Column 3.
Ward collects the November rent on December 15, 1996, and posts the payment to the Ocean View rent receivable on Form 1, Column 5. She notes "FA" in Column 6 to indicate that the asset has been fully administered. The cash receipt of $500 is also posted on Form 2.
Because there is equity for the estate in the rental property, Ward decides to continue the lease and collect rent until the property is sold. Ward records post-petition rents as an "unscheduled" asset on Form 1 (Asset #12), lists the petition value as "unknown" in Column 2 and the Estimated Net Value as "N/A" in Column 3, and documents the rents in Column 5, Form 1 and on Form 2 as they are received.
On March 1, 1997, Ward obtains court authority to sell the rental property to Joe Fish for $90,000, and to pay the following amounts through escrow upon closing of the sale: (a) $30,000 lien encumbering the property; (b) $5,400 realtor's fee, and (c) $1,800 property taxes and costs of sale. No capital gains tax is incurred upon the sale. Form 2 illustrates the correct way to record the $52,800 in net proceeds from the sale. Ward records the gross sale price of $90,000 on Form 1, Column 5 and notes "FA" in Column 6 to indicate that the asset has been fully administered.
Accounts Receivable (Asset #3), 1994 Chevy Van (Asset #6) & Office Equipment (Asset #7)
National Bank claims a valid and perfected blanket lien against the accounts receivable, 1994 Chevy van, and office equipment as security for its loan of $10,000. As discussed below, Ward estimates that she can collect approximately $9,000 of the accounts receivable, sell the van and the office equipment, payoff the bank's lien, and realize a $9,700 net benefit for the estate from the administration of these assets.
Analysis of Net Benefit to Estate:
|Estimated fair market value||$9,000||$9,000||$4,000||$22,000|
|Estimated costs of sale (11%)||0||(900)||(400)||(1,300)|
|Allocation of payoff to bank(1)||(9,000)||(1,000)||0||(10,000)|
|Estimated tax consequences(2)||0||0||0||0|
|Net benefit to the estate(3)||$0||$6,100||$3,600||$9,700|
During the reporting period, Ward collects $5,000 from three customers: Hall Cards, Card Enterprises, and Excel Corporation. She records the receipts in the Accounts Receivable Ledger and posts them on Form 1, Column 5 and on Form 2. On February 28, 1997, Ward disburses the sum of $5,000 to National Bank in partial payment of its lien and documents the disbursement on Form 2. Ward estimates the gross value of the remaining accounts receivable to be $4,000, and discloses this amount on Form 1, Column 6. Ward also discloses as Note 1 on Form 1 that National Bank's lien encumbers Asset Nos. 3, 6 and 7.
1994 Chevy Van. Debtor listed a 1994 Chevy Van in Schedule B valued at $5,000, and claimed a $1,000 exemption in the vehicle in Schedule C. Ward checks the NADA book and determines that the van is worth $8,000 to $10,000. Ward attributes the remaining National Bank lien to the van (see above) and lists the value of the van on Form 1, Column 3 as $6,100 ($9,000 less $1,000 lien, $1,000 exemption, and $900 estimated costs of sale).
Office Equipment. Debtor also listed miscellaneous office equipment in Schedule B valued at $5,000. Ward determines that the fair market value of the office equipment is only $4,000. Ward lists the petition value of the office equipment as $5,000 in Form 1, Column 2, and discloses the net benefit to the estate of $3,600 ($4,000 fair market value less $400 estimated costs of sale) in Form 1, Column 3.
Sale of 1994 Chevy Van and Office Equipment. On May 2, 1997, Ward obtains court authorization to hire an auctioneer to sell the van and office equipment. On June 15, 1997, the van and office equipment are sold in bulk to Susan Taylor, who also is in the card business, for the sum of $8,000. The auctioneer remits the gross proceeds of $8,000 on June 17, 1997. Ward deposits the funds in the estate checking account and disburses $5,000 for the balance due to National Bank for the lien against the receivables, van and office equipment, and $1,200 for auctioneer fees and expenses. These transactions are shown on Form 2.
Ward records the gross proceeds from the bulk sale of the van and office equipment on Form 1. Since the auctioneer did not provide a breakdown of the gross proceeds allocable to each asset, Ward posts the full amount next to the van (Asset #6) on Form 1, Column 5, and adds a note at the bottom of Form 1 to explain that the sale proceeds include the office equipment (Asset #7). Ward also posts the deposit of $8,000 on Form 2 and explains under "Description of Transaction" that both assets were included in a bulk auction sale of Assets #6 and #7.
On June 25, 1997, after the National Bank lien has been paid, Ward sends a check to the Debtor for the $1,000 exemption claimed for the van.
Household Goods (Asset #4) - Debtor listed household goods in Schedule B valued at $2,000, and properly claimed them as exempt in Schedule C. Ward records the value of the household goods to the estate as -0- ($2,000 value less $2,000 exemption) on Form 1, Column 3. Ward also notes on Form 1, Column 4 that the asset is deemed abandoned (DA) pursuant to 554(c) and in Column 6 that the asset is fully administered (FA).
Artwork (Asset #5) - Debtor listed artwork in Schedule B valued at $10,000. Ward obtains court authorization on February 26, 1997, to employ Lily Spence, an appraiser, to perform an appraisal of the artwork for $1,000. Based upon the appraisal, Ward determines that the artwork is worth $15,000. On Form 1, Column 3, Ward records $12,500 as the estimated net value to the estate ($15,000 value less $1,000 appraisal fee, $1,500 costs to sell, and -0- taxes).
Ward pays the court-approved fee of $1,000 to the appraiser on March 31, 1997, and records the payment in Form 2.
The Debtor, who is interested in retaining some of the artwork, reaches an agreement with Ward for a private sale of $5,000 worth of the artwork back to the Debtor, payable in five monthly installments of $1,000 each, commencing April 12, 1997. The sale is approved by the court on March 31, 1997 (or properly noticed to creditors by the court and no objections are filed). The remaining artwork is consigned to an art gallery. Ward records the Debtor's April 12, 1997 payment on Form 1, Column 5, and on Form 2. Ward also notes the value of the remaining artwork to be collected/sold on Form 1, Column 6.
On April 20, 1997, Debtor's check for the first payment is returned to Ward marked "NSF." Ward redeposits the check and it is paid. Ward records the "NSF" check and the redeposit on Form 2. Debtor then fails to make the payments due in May and June. Ward notes on Form 1 as a "major activity affecting case closing" that collection efforts are pending against the Debtor to collect the delinquent payments Ward further notes that a public auction of the remaining artwork is set for August 15, 1997.
One-Half Interest in Homestead (Asset #9) - Debtor listed a residence at 55 Lake Drive in Schedule A which he owned and occupied with his non-debtor spouse (not community property). The total value of the Debtor's interest plus that of the non-debtor spouse was listed in Schedule A at $75,000. The debtor's share of the Schedule A value (½ - $37,500) is recorded on Form 1, Column 2. The house is encumbered by a lien of $20,000. Ward determines that the value to the estate is $7125.
Analysis of Net Benefit to Estate:
|Estimated fair market value (100%)||$75,000|
|Real estate commission (5%)||(3,750)|
|½ to debtor's spouse||(24,125)|
|Estimated estate capital gain tax||(2,000)|
|Debtor's state law homestead exemption||(15,000)|
|Net benefit to the estate||$7,125|
Ward lists the house for sale and obtains an offer of $100,000. Ward then files a motion under § 363(h) to sell both the Debtor's interest and the non-debtor's interest in the property, and sends notice of the proposed sale to creditors. The Debtor's spouse objects to the sale, but the objection is overruled and the sale is approved. Ward reflects the gross proceeds realized by the estate as $50,000 in Form 1, Column 5. The net proceedsof $35,500 ($50,000 value less $10,000 [½ lien] less $2,500 [½ real estate fee] less $2,000 [½ costs to sell]) are recorded in
Form 2, Column 5. In Column 4, Ward explains the difference between the gross and net proceeds.
On May 15, 1997, Ward sends a $15,000 check to the Debtor for the state homestead exemption.
1993 Ford Truck (Asset #10) - Debtor listed a 1993 Ford Truck in Schedule B valued at $8,000. The truck is fully secured. Ward confirms through the NADA book that the value of the truck to the estate (less liens) is -0-. Ward cannot determine if the truck is covered by casualty insurance and, therefore, files a motion to abandon the truck pursuant to § 554(a) to protect the estate from any liability. No objections are filed. Ward posts the value of the truck as -0- on Form 1, Column 3. Ward also notes in Column 4 that the asset has been abandoned by court order (OA) and in Column 6 that it is fully administered (FA).
ABC Preference (Asset #11) - Debtor disclosed in response to Statement of Financial Affairs, Question #3, that numerous payments were made to ABC Supply Company within 90 days prior to bankruptcy. Ward's investigation reveals that approximately $5,000 was paid by the Debtor to ABC Supply Company on account of an antecedent debt within the preference period. Ward lists the preference action as a scheduled asset with an "unknown" value in Form 1, Column 2, and discloses the estimated net value as $5,000 in Form 1, Column 3.
Ward commences an adversary proceeding to recover the preference under § 547(b). In its answer, ABC Supply Company alleges that the transfer constituted a contemporaneous exchange for new value to the Debtor which cannot be avoided under § 547(c)(4). Because negotiations to settle the preference action for $2,000 are pending, Ward records the remaining value of the preference action to be administered as $2,000 in Form 1, Column 6. Ward explains this new valuation(4) in a note on Form 1, and further notes as a "major activity affecting case closing" that settlement negotiations are pending in the case.
Personal Injury Suit (Asset #13) - Late in June 1997, the Debtor's attorney notified Ward concerning the pendency of a lawsuit in state court involving a pre-petition personal injury claim that the Debtor failed to list in Schedule B or disclose at the § 341(a) meeting. Having insufficient time to determine the value of the asset to the estate, Ward lists the value of the unscheduled personal injury claim as "unknown" in Form 1, Columns 2, 3, and 6. Ward notes on Form 1 as a "major activity affecting case closing" that a meeting with special counsel concerning the case is set on August 2, 1997, and that trial is anticipated during the month of January 1998.
Fraudulent Transfer to Sister (Asset #14) - Ward learns that the Debtor transferred a substantial amount of jewelry to his sister within 12 months prior to bankruptcy. The jewelry was not disclosed in Schedule B nor was the transfer disclosed in the statement of financial affairs. Ward retains the Jones Law Firm as counsel and commences a fraudulent transfer action against the Debtor's sister for recovery of the jewelry. The litigation is still pending. Ward's counsel is awarded interim fees of $2,000 on May 12, 1997. Ward lists the value of the unscheduled fraudulent transfer action as $20,000 in Form 1, Columns 2, 3, and 6. Ward records the disbursement of interim attorney's fees to the Jones Law Firm in Form 2, and notes on Form 1 as a "major activity affecting case closing" that settlement negotiations are pending in the case.
Interest Earned (Asset #15) - To maximize the return to creditors, Ward periodically invests estate funds exceeding her day-to-day requirements in certificates of deposit (CDs) and interest-bearing accounts. The total amount of interest to be earned is designated as "N/A" in Form 1, Column 3. Ward posts the amount of interest actually collected on Form 1, Column 5 and Form 2, and the amount of interest remaining to be collected as "unknown" on Form 1, Column 6.
Mistaken Deposit - Ward mistakenly deposits $500,000 into this estate account rather than in the estate account in the unrelated case of In re Steve Martin. Ward quickly realizes her error and writes a check to the correct account. The check is posted as a negative receipt on Form 2, Column 5 so that the column totals are not overstated.
Bond Premium - On May 1, 1997, Ward makes a disbursement of $100 to Green Bond Co. in payment of the bond premium attributable to this estate. Ward records the disbursement for the bond premium on Form 2.
Because the case is still open at the end of the semi-annual reporting period, Ward completes the bottom section of Form 1, detailing the matters still pending in the case and provides an updated estimate as to when a final report (TFR) will be filed for this estate.
1. Allocated to the assets in the order they were listed on Schedule B.
2. Due to losses from the card business, Ward estimates that no taxes will be due as a result of these transactions.
3. The trustee's compensation is also a considertaion in determining whetheror not to administer an asset.
4. The costs to file and settle the adversary are negligible.
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