Question

A debtor (Joe Corp) has filed for chapter 7 bankruptcy. the balance sheet upon filings is as follows:

Cash 10 Lien Against Building 80

Building 100 Priority Creditors 30

Unsecured Creditors 20

Total Assets 110    Total Liabilities. -130

The Lien on the building is held by Coco University. The priority creditor consists of 2 creditors, and it is the City of Camden and The City of Newark at $20 and $10 respectively. The Unsecured creditors, is also 2 creditors, and it is the State of New Jersey and the State of Pennsylvania at $15 and $5 respectively.

1. If the building gets sold for $80, What amounts does each party get paid?
2. If the building gets sold for $105, How much does each party get paid?
3. If the building gets sold for $75, how much does each party get paid?

Answer 1

As there is a lien against building, first that lien will be discharged i.e. paid. Out of the remaining amount, priority creditors will be paid and then the unsecured creditors will be paid.

a) The building gets sold for $80. Only the lien will be discharged with this amount and creditors will receive nothing.

b) If the building gets sold for $105, lien will be discharged with $ 80. Priority creditors will be paid $25 in the ratio of 20:10 i.e. 2:1

City of Camden= 25*2/3= $16.67

City of Newark= 25*1/3= $8.33

c)Building gets sold for $75, there is a shortage in payment for lien for $5. The owner will have to bear this $5 and the creditors will not receive anything.