Types And Effects Of Bankruptcy Proceedings - CPA Reg

1. Which debt is automatically nondischargeable in Chapter 7?
   Answer: Past due child support Past due child support is a domestic support obligation, and support obligations are automatically excepted from discharge in Chapter 7. The tempting wrong answer is luxury credit card purchases: those are only nondischargeable if they fit the specific fraud presumption for goods or services over a set total within 90 days before filing, so they are not automatic. Medical bills and friend loans are dischargeable unless separate fraud applies.
2. Under the Bankruptcy Code, what is a 'cram down' in the context of a Chapter 11 plan?
   Answer: A cram down allows the court to confirm a Chapter 11 plan over the objection of a dissenting class of creditors if the plan does not discriminate unfairly, is fair and equitable to that class, and meets the absolute priority rule. Under 11 U.S.C. Section 1129(b), when a class of creditors rejects a Chapter 11 plan, the court may still confirm the plan over the objection (cram it down) if: (1) at least one impaired class has accepted the plan; (2) the plan does not discriminate unfairly against the dissenting class; and (3) the plan is 'fair and equitable' to the dissenting class. For secured creditors, fair and equitable requires that they retain their liens and receive at least the present value of their claims. For unsecured creditors, fair and equitable requires the absolute priority rule: senior creditors must be paid in full before junior creditors or equity holders receive anything. Answer A describes an involuntary conversion. Answer C partially describes one aspect of cram down treatment for secured creditors but does not define the full concept. Answer D overstates the equity result.
3. Under Chapter 13 of the Bankruptcy Code, what is the primary benefit for individual debtors?
   Answer: Chapter 13 allows individual debtors with regular income to keep their assets (including non-exempt assets) and repay all or a portion of their debts over a 3-to-5-year plan, while potentially retaining property that would otherwise be liquidated in Chapter 7. Chapter 13 allows individuals with regular income to retain their assets and restructure their debts through a 3-to-5-year repayment plan approved by the court. This is the key advantage over Chapter 7: the debtor can keep non-exempt property by proposing a plan that pays creditors at least what they would receive in a Chapter 7 liquidation. Chapter 13 also allows modification of certain secured debts. Answer A is incorrect because student loans and domestic support obligations remain non-dischargeable even in Chapter 13. Answer C is incorrect because Chapter 13 requires a meaningful repayment plan. Answer D is incorrect because Chapter 13 is exclusively for individuals (with a debt limit).
4. Under 11 U.S.C. Section 547, a bankruptcy trustee may avoid a preferential transfer. Which of the following elements must be established for a transfer to be a voidable preference?
   Answer: The transfer must have been made to or for the benefit of a creditor, on account of an antecedent debt, while the debtor was insolvent, within 90 days before the bankruptcy filing (or one year for insiders), and must enable the creditor to receive more than in a hypothetical Chapter 7 liquidation. Under 11 U.S.C. Section 547(b), a preferential transfer has five elements: (1) a transfer of the debtor's property; (2) to or for the benefit of a creditor; (3) on account of an antecedent debt; (4) while the debtor was insolvent (presumed during the 90 days before filing); (5) made within 90 days before filing (or one year for insiders); and (6) enabling the creditor to receive more than in a Chapter 7 liquidation. Answer A incorrectly states that the transfer must be made MORE than 90 days before filing; it must be made WITHIN 90 days. Answer B is incorrect because preferences apply to unsecured creditors primarily (secured creditors are less commonly affected). Answer C is incorrect because the 90-day rule, not family relationship, is the default; family members are insiders with a one-year lookback.
5. Under 11 U.S.C. Section 362(d), a secured creditor may seek relief from the automatic stay. On what grounds may relief be granted?
   Answer: Relief may be granted for cause (including lack of adequate protection of the creditor's interest in the collateral) or if the debtor has no equity in the property and the property is not necessary for an effective reorganization. Under 11 U.S.C. Section 362(d), a court may grant relief from the automatic stay for: (1) 'cause,' including the lack of adequate protection of the creditor's interest in the property (e.g., declining collateral value without protection payments); or (2) with respect to a stay against an act against property, if the debtor does not have equity in the property and the property is not necessary for an effective reorganization. Adequate protection mechanisms include cash payments, additional liens, or other court-ordered protections. Answer A is incorrect because relief may be sought by motion over debtor objection. Answer C is incorrect because relief is available to all secured creditors. Answer D is incorrect because the automatic stay can be lifted by court order.
6. Under the priority scheme in 11 U.S.C. Section 507, which of the following creditors is paid first in a Chapter 7 liquidation?
   Answer: Administrative expenses of the bankruptcy estate (such as trustee's fees and attorneys' fees for the estate). The distribution priority in Chapter 7 follows Sections 506 and 507. Secured creditors are paid first from the proceeds of their collateral (not through the Section 507 priority scheme). Among unsecured creditors, Section 507(a) establishes the following priority order: (1) administrative expenses; (2) certain involuntary case gap creditors; (3) domestic support obligations; (4) wages of employees up to $15,150; (5) employee benefit plan contributions; (6) grain farmer and fisherman claims; (7) consumer deposits; (8) government tax claims; (9) bank commitment claims; and (10) general unsecured creditors (last). Answer A (general unsecured) is last. Answer B (secured creditors) is paid from collateral proceeds before the priority scheme. Answer D (taxes) has lower priority than administrative expenses.
7. Debtor owes $4,000,000 in unsecured debts and wants to keep assets and pay from future income. Which chapter is best?
   Answer: Chapter 11 reorganization Chapter 11 lets you reorganize and keep assets while paying $4,000,000 in unsecured debt from future income, with no debt ceiling. Chapter 13 also uses future income, which makes it tempting, but its unsecured-debt limit is far below $4,000,000, so you can't use it. Chapter 7 is liquidation and Chapter 12 is limited to farmers.
8. Under Chapter 12 of the Bankruptcy Code, who may file for Chapter 12 relief?
   Answer: Family farmers and family fishermen with regular annual income, subject to debt limits, who wish to restructure their debts while continuing farming or fishing operations. Chapter 12 was created specifically for family farmers and family fishermen. Eligibility requires: (1) the debtor must be a family farmer (individual, couple, or small corporation whose principal business is farming) or family fisherman; (2) the debtor must have regular annual income; and (3) the debtor's total debt must not exceed specified limits. Chapter 12 provides a simpler and less expensive reorganization process than Chapter 11, and allows farmers to retain their farms while restructuring debt. Answer B describes an unrelated program. Answer C describes Chapter 13 (individual consumers). Answer D describes Chapter 11 (large business reorganizations).
9. Which action is NOT barred by the automatic stay?
   Answer: Criminal prosecution of debtor Criminal prosecution is an exercise of police power, not debt collection, so it falls outside the stay. The stay bars creditor actions to collect a debt or enforce a lien, such as wage garnishment, repossession, and foreclosure. Foreclosure is the tempting wrong answer, but it's a secured creditor's lien foreclosure, which the stay does halt.
10. Under the Bankruptcy Code, when a Chapter 11 plan of reorganization is confirmed by the court, what is the effect on the debtor's pre-confirmation debts?
    Answer: Confirmation of the plan binds all creditors (whether or not they accepted or rejected the plan) to the plan's terms; for non-individual debtors (corporations, LLCs), the debtor is generally discharged upon confirmation, while individual debtors receive discharge only after completing plan payments. Under 11 U.S.C. Section 1141(a), confirmation of a Chapter 11 reorganization plan binds all creditors and equity holders, whether or not they accepted or rejected the plan. Regarding discharge: for non-individual debtors (corporations and LLCs), Section 1141(d)(1) generally grants discharge upon confirmation. However, for individual Chapter 11 debtors, Section 1141(d)(5) provides that discharge is granted only after the debtor completes all payments under the plan, similar to Chapter 13. This 'cram down' effect allows reorganization to proceed even over the objections of dissenting creditor classes. Answer A is correct. Answer B is incorrect because even non-consenting creditors are bound. Answer C is incorrect because binding effect is universal, not limited to affirmative voters. Answer D is incorrect because secured creditors are also bound by the plan's treatment of their claims.
11. Under 11 U.S.C. Section 541, what property is included in the bankruptcy estate upon the filing of a petition?
    Answer: All legal and equitable interests of the debtor in property as of the commencement of the case, wherever located and by whomever held, with specified exceptions. Under 11 U.S.C. Section 541(a), the bankruptcy estate consists of all legal and equitable interests of the debtor in property as of the commencement of the bankruptcy case, wherever located and by whomever held. This extremely broad definition includes: real and personal property, tangible and intangible property, interests as lessee or licensee, contingent interests, and future interests to the extent they vest within 180 days after filing. Exemptions then allow the debtor to withdraw certain property from the estate. Answer A is incorrect because property is included by law, not just by listing. Answer C is too narrow. Answer D is incorrect because the estate includes property outside the United States.
12. Under the Bankruptcy Code, a Chapter 7 bankruptcy is commonly known as a liquidation bankruptcy. Which of the following correctly describes a Chapter 7 case?
    Answer: A trustee is appointed to collect and liquidate the debtor's non-exempt assets, the proceeds are distributed to creditors in priority order, and the debtor may receive a discharge of remaining eligible debts. Chapter 7 is a liquidation bankruptcy in which a court-appointed trustee takes control of the debtor's non-exempt assets, converts them to cash, and distributes the proceeds to creditors according to the statutory priority scheme. After the liquidation, the individual debtor may receive a discharge of eligible unsecured debts. Answer A describes Chapter 13 (individual reorganization) or Chapter 11 (business reorganization). Answer B describes Chapter 9 (municipal bankruptcy). Answer C describes Chapter 12 (family farmer reorganization).
13. Under 11 U.S.C. Section 363, the bankruptcy trustee may sell estate property outside the ordinary course of business. What is a Section 363 sale?
    Answer: A court-approved sale of estate property free and clear of all liens, claims, and interests of creditors, allowing a purchaser to acquire assets without assuming the debtor's liabilities, subject to creditors' liens attaching to the proceeds. Section 363 allows the trustee or DIP to sell estate property outside the ordinary course of business with court approval, provided there is a sound business reason. Under Section 363(f), the sale may be made free and clear of all liens, claims, and interests if certain conditions are met, allowing purchasers to acquire assets without the debtor's historical liabilities. Creditors' liens attach to the proceeds instead of the property. This mechanism has been used in major corporate bankruptcies to sell businesses rapidly while protecting buyers from successor liability. Answer A is incorrect because insider transactions face additional scrutiny. Answer B is incorrect because all creditors need not approve, though they are entitled to notice and opportunity to object. Answer C is incorrect because the sale is free of creditor claims, not debts - the debtor still owes the money.
14. Under 11 U.S.C. Section 707(b), individual Chapter 7 debtors may be subject to the means test. Which of the following correctly describes the means test?
    Answer: The means test compares the debtor's average monthly income to the state median income; if the debtor's income exceeds the median, a presumption of abuse arises and the court may dismiss the case or convert it to Chapter 13 if the debtor has sufficient disposable income to repay debts. The means test under Section 707(b) was added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) to prevent high-income debtors from using Chapter 7 to discharge debts they could afford to repay. If a debtor's average monthly income over the prior six months exceeds the applicable state median income, and if the debtor's monthly disposable income (after allowed expenses) exceeds a threshold, a presumption of abuse arises, and the case may be dismissed or converted to Chapter 13. Answer A is incorrect because the means test applies based on income, not debt level. Answer B describes a Chapter 13 concept. Answer C is incorrect because the means test applies to individual, not business, debtors.
15. Under the Bankruptcy Code, what types of tax claims are non-dischargeable in Chapter 7?
    Answer: Income taxes for which a return was due within three years before bankruptcy, income taxes assessed within 240 days before filing, taxes for which no return was filed or for which a fraudulent return was filed, and employment taxes. Under Section 523(a)(1), certain tax debts are non-dischargeable in bankruptcy: (1) income taxes for which a return was due (including extensions) within three years before the bankruptcy petition; (2) income taxes assessed within 240 days before filing (the 240-day rule); (3) taxes that were not assessed but were assessable as of the petition date; (4) taxes for which no return was filed or for which a fraudulent return was filed; and (5) employment trust fund taxes. Older tax debts that meet all these tests (return filed on time, assessed more than 240 days ago, not fraudulent) may be dischargeable. Answer B is incorrect because older tax debts may be dischargeable. Answer C is incorrect because even older tax debts may be non-dischargeable under the listed tests. Answer D is incorrect because all types of federal taxes may be non-dischargeable.
16. When a bankruptcy petition is filed, the automatic stay goes into effect. Under 11 U.S.C. Section 362, which of the following correctly describes the automatic stay?
    Answer: The automatic stay is a court injunction that immediately halts virtually all collection actions against the debtor and the bankruptcy estate, including lawsuits, levies, foreclosures, repossessions, and wage garnishments. Under 11 U.S.C. Section 362, the filing of a bankruptcy petition automatically stays all actions against the debtor or the bankruptcy estate, including: lawsuits, enforcement of judgments, attempts to obtain possession or control of estate property, acts to create, perfect, or enforce liens, and acts to collect on a pre-petition claim. The stay is immediate, requires no court order, and applies to virtually all creditors. Answer A is incorrect because the stay applies to all creditors, not just the IRS. Answer B is incorrect because the stay halts even pre-judgment collection activities. Answer C is incorrect because the stay applies to both secured and unsecured creditors.
17. In a Chapter 7 liquidation, after paying secured creditors from collateral and administrative expenses, the remaining assets are distributed to unsecured creditors. Which of the following correctly states the priority order among unsecured creditors?
    Answer: Priority unsecured creditors (domestic support obligations, wages, taxes, etc.) are paid in the statutory priority order before general unsecured creditors receive anything. Section 507 establishes a hierarchy among unsecured creditors: (1) domestic support obligations; (2) administrative expenses; (3) certain involuntary gap claims; (4) employee wages (up to $17,150 per employee, subject to periodic inflation adjustment); (5) employee benefit plan contributions; (6) grain farmers and fisherman claims; (7) consumer deposits; (8) certain governmental tax claims; (9) bank commitment claims. Only after all priority creditors are paid in full do general unsecured creditors (trade creditors, bondholders, etc.) receive anything. Answer C is correct. Answer A is incorrect because priority creditors are paid before general creditors. Answer B reverses the order of domestic support obligations and taxes. Answer D is incorrect because priority creditors are paid first.
18. Under 11 U.S.C. Section 506, how is a secured creditor's claim treated in bankruptcy when the value of the collateral is less than the amount owed?
    Answer: The claim is bifurcated: the secured claim equals the value of the collateral, and any deficiency (amount owed in excess of collateral value) is treated as an unsecured claim. Under 11 U.S.C. Section 506(a), a secured creditor's claim is bifurcated when the collateral is worth less than the debt. The creditor has: (1) a secured claim equal to the value of the collateral; and (2) an unsecured deficiency claim for any amount owed above the collateral value. For example, if a creditor is owed $100,000 and the collateral is worth $70,000, the creditor has a $70,000 secured claim and a $30,000 unsecured deficiency claim. Answer A is incorrect because the claim is not entirely unsecured; the collateral secures up to its value. Answer B is incorrect because the secured claim is capped at collateral value. Answer C is incorrect because the deficiency becomes an unsecured claim, not extinction.
19. Under 11 U.S.C. Section 544, what is the 'strong-arm clause' and how does it benefit the bankruptcy trustee?
    Answer: The strong-arm clause gives the bankruptcy trustee the status of a hypothetical lien creditor, judgment creditor, and bona fide purchaser of real property as of the petition date, allowing the trustee to avoid any unperfected security interests or transfers that could have been avoided by such a creditor. Under 11 U.S.C. Section 544, the bankruptcy trustee (or DIP in Chapter 11) has the power of a hypothetical lien creditor, judicial lien creditor, and bona fide purchaser of real property. This 'strong-arm' power allows the trustee to avoid transfers that such hypothetical parties could have avoided under applicable state law. Most importantly, this allows the trustee to avoid unperfected security interests - if a secured creditor did not properly perfect their lien before bankruptcy, the trustee can avoid that lien, making the creditor an unsecured creditor. Answer A describes recovery of post-petition assets which is a different provision. Answer B is too broad; only unperfected interests are avoidable. Answer D describes Section 363(f) sales, a different provision.
20. A court finds Chapter 7 abuse under the means test. What may it do?
    Answer: Dismiss or convert case Under the means test, a finding of abuse lets the court dismiss your Chapter 7 case or, with your consent, convert it to Chapter 13. It cannot reduce unsecured debts, reaffirm secured debts, or deny discharge outright; discharge denial is a separate penalty for misconduct, not the remedy for means-test abuse.

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