We saw that a preference, within this definition, constituted an act of bankruptcy (Section 8 of this chapter). Beyond what is necessary to prove that a preference has been given constituting an act of bank ruptcy it must be shown that the creditor knew or had reason to know that he was being preferred. If this can be shown, then the preference, if it conforms to all the other requirements of the above definition, will be voidable, and as we saw, the creditor will have to give up the preference if he wants to get any fur ther benefits from the estate by having his claims al lowed.
20. Priority of debts in distribution of bankrupt's estate.—In dividing the bankrupt's assets among creditors certain priorities are established by the law, the order being as follows: 1. Taxes due United States government.
2. Other taxes.
3. Cost of preserving and administering the bank rupt's estate.
4. Fees paid to the court clerk by creditors and one fee for attorney of bankrupt or petitioning credi tors.
5. Wages, not exceeding $300, earned during three months prior to the filing of the petition.
6. Claims secured by valid unavoidable liens.
7. Debts given priority by United States or State laws.
The claims in each class will have to be paid in full before claims in any subsequent class can receive any payment whatever. The last class, in order to be paid, is the general unsecured claims.
21. Dividends in was stated in the previous section, general creditors are entitled to no dividends whatever until the priority claims have been taken care of. If, after these have been paid, there is a surplus equal in amount to five per cent of the general claims, a dividend must be paid on them within 30 days of the adjudication of bankruptcy; and thereafter dividends must be paid whenever the real ized surplus equals 10 per cent of the general claims. The law also provides that the first dividend cannot exceed 50 per cent of the general claims, that the final dividend must not be paid within three months of the adjudication and that the dividends must not be less than two in number.
22. Composition with credit man knows that litigation is expensive. If it becomes evi dent that the bankrupt is honest and that there is to be little difficulty in ascertaining the amount of his estate, it may be wise to permit him to handle his own affairs and to accept his proposal to pay so many cents on the dollar as a full discharge of his duties.
In determining whether a composition shall be ac cepted or not, due consideration must be given to the honesty and ability of the bankrupt, to the possible value of his estate and to the number and size of the claims that will probably be presented and al lowed.
A composition with creditors must always be con firmed by the court. If it has been confirmed, the bankrupt may apply for his discharge. Under the law the court cannot confirm a proposed composition unless the following conditions have been met: (1 ) the schedules must have been filed; (2) the bankrupt must have been examined; (3) the composition must have been accepted in writing by the majority of the creditors representing more than half the bank rupt's debts; (4) enough money must have been deposited in amount to pay (a) the composition, (b) the cost of court proceedings, (c) preferred debts in full; (5) the judge must be satisfied that the composi tion will best serve the interests of all the creditors; (6) it must be established that the bankrupt has not committed fraud; (7) the composition must not be fraudulent; (8) the composition must not be for much less than the real value of the estate. When the ap plication is being made for the confirmation of the composition, any creditor may object at the hearing and raise the objection that any one of the conditions above enumerated is lacking. After hearing all sides, the court can use its own discretion in confirming or rejecting the composition.
23. Discharge of bankrupt.—As was indicated above, one of the main purposes of bankruptcy laws is to discharge the bankrupt debtor, thereby giving him a new start in life. Under the present bank ruptcy act this discharge may take place any time after one month from adjudication. Application for a discharge must be made within twelve months of the adjudication of bankruptcy, but this time may be extended six months by the court. The bankrupt can not be discharged from liability for his debts if he is guilty of fraud or has been previously discharged in bankruptcy within six years.
24. Debts not discharged in bankruptcy.—The ef fect of a discharge generally is to cancel all liability on debts incurred before the filing of the petition. A discharge in bankruptcy, however, does not cancel the following debts: 1. Those incurred after the petition has been filed.