Jake is a sole proprietor and operates a service station. For the past year, he has been unable to pay his debts when due and there is a significant disparity between his liabilities and his assets. On Feb 1, 2016 he filed a petition under the bankruptcy code. His nonexempt property totals $200,000.  He makes an income of $100,000 annually in his business.Some of his debts include the following:

1. Arrears in alimony of $20,000.

2. Federal income taxes of $30,000 for 2015 and $25,000 for 2014.

3. An unpaid judgment for $300,000 for negligence when a car that was improperly repaired by Jake caused an automobile accident and killed the driver.

4. A student loan for $50,000.

5. Credit card debt for luxury items totaling $50,000 incurred during the last two years.

6. An equity line of credit on his home with XYZ for $20,000 which he then took and spent on luxury items during the last 30 days.

 

Two weeks prior to filling his petition, Jake:

1. Conveyed to his girlfriend a car worth $50,000 for $5,000.

2. Repaid an unsecured loan with a supplier for $20,000.

3. Gave his son a gift of $20,000 for his birthday.

 

Discuss the following:

 

1. Which type of bankruptcy petition should Jake file for?

 

2. Which debts will be discharged? Which will not be discharged? Provide an explanation and rationale as to why Congress has allowed or disallowed each particular debt? What is the public purpose? Do you agree with Congress? What is your opinion?

 

3. Which transfers will be set aside (reversed) and why?

 

4. Discuss the ethical issues in this scenario. 

 

5. General Question: 

 

In circumstances such as this, what do you think is the purpose of the bankruptcy code, does it accomplish its objectives, should it be reformed? Each student should propose one new specific recommendation to revise the code to accomplish its purposes.