CPA Regulation Reg Quiz: Types And Effects Of Bankruptcy Proceedings

What this quiz covers

This quiz focuses on Types And Effects Of Bankruptcy Proceedings, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Regulation Reg.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. The automatic stay prevents only the IRS from collecting taxes during the bankruptcy.
2. The automatic stay allows creditors to continue collection activities if they obtained judgment before the filing.
3. The automatic stay applies only to secured creditors.
4. 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. (correct answer)

Explanation: 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.

Question 2

1. General unsecured creditors.
2. Secured creditors with perfected liens.
3. Administrative expenses of the bankruptcy estate (such as trustee's fees and attorneys' fees for the estate). (correct answer)
4. Tax claims of governmental units.

Explanation: 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.

Question 3

1. The transfer must have been made more than 90 days before the bankruptcy filing.
2. The transfer must have been made to a secured creditor.
3. The transfer must have been made to a family member of the debtor.
4. 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. (correct answer)

Explanation: 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.

Question 4

1. A transfer made within two years before bankruptcy for which the debtor received less than reasonably equivalent value while insolvent or left insolvent by the transfer. (correct answer)
2. A transfer made with actual intent to delay or defraud creditors, regardless of when made.
3. A transfer made to a secured creditor as payment of an existing debt.
4. A transfer made more than four years before bankruptcy to a charitable organization.

Explanation: Under Section 548, there are two types of fraudulent transfers: (1) actual fraud - a transfer made with actual intent to hinder, delay, or defraud creditors, within two years before bankruptcy; and (2) constructive fraud - a transfer within two years before bankruptcy for which the debtor received less than reasonably equivalent value while the debtor was insolvent, became insolvent as a result, had unreasonably small remaining capital, or intended to incur debts beyond their ability to pay. Answer A correctly describes constructive fraud. Answer B describes actual fraud but overstates the lookback period (it is two years in federal bankruptcy law, though state law may extend this). Answer C describes an ordinary payment that is not a fraudulent transfer. Answer D has the timing wrong for the federal bankruptcy fraudulent transfer provision.

Question 5

1. Relief may be granted only if the debtor consents.
2. 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. (correct answer)
3. Relief may be granted only for residential mortgage lenders.
4. Relief may not be granted; the automatic stay is absolute.

Explanation: 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.

Question 6

1. The strong-arm clause allows the trustee to recover post-petition assets for the estate.
2. The strong-arm clause allows the trustee to void all pre-petition security agreements.
3. 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. (correct answer)
4. The strong-arm clause allows the trustee to sell estate property free and clear of all liens.

Explanation: 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.

Question 7

1. Any contract that was signed before the bankruptcy petition was filed.
2. A contract in which both parties still have material, unperformed obligations; the trustee may assume (adopt and continue) or reject (breach) the contract, with rejection treated as a pre-petition breach. (correct answer)
3. A contract that has been fully performed by both parties.
4. A contract for the employment of the debtor's employees.

Explanation: An executory contract is one where material performance obligations remain on both sides (the most commonly cited definition comes from Professor Vern Countryman). Under Section 365, the bankruptcy trustee or DIP may assume (take over and be bound by) or reject (breach) executory contracts. Rejection is treated as a pre-petition breach, making the non-debtor party an unsecured creditor for damages. Assumption requires curing defaults and providing adequate assurance of future performance. Answer A is too broad; not all pre-petition contracts are executory. Answer C describes a fully performed contract, which cannot be executory. Answer D is a type of executory contract but does not define the concept.

Question 8

1. The creditor must prove the debtor filed for bankruptcy in bad faith.
2. The creditor must show the debtor was insolvent when they incurred the debt.
3. The creditor must show the debt was incurred within 90 days of bankruptcy.
4. The creditor must prove the debtor made a material false representation with intent to deceive, the creditor justifiably relied on the representation, and suffered a loss as a proximate result. (correct answer)

Explanation: Under Section 523(a)(2)(A), to establish that a debt is non-dischargeable due to fraud, the creditor must prove: (1) the debtor made a materially false representation; (2) the debtor knew the representation was false or acted with reckless disregard for the truth; (3) the debtor intended to deceive; (4) the creditor justifiably relied on the false representation; and (5) the creditor suffered damages proximately caused by the fraud. This is similar to a civil fraud claim and must be pursued through an adversary proceeding in the bankruptcy court. Answer A (bad faith filing) is a different concept. Answer B (insolvency at time of debt) is not required for fraud. Answer C (90 days) relates to preference payments.

Question 9

1. 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. (correct answer)
2. All federal, state, and local tax debts regardless of age.
3. Only current-year tax liabilities; taxes from prior years are dischargeable.
4. Only sales taxes; income taxes are always dischargeable.

Explanation: 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.

Question 10

1. A cram down occurs when the trustee forces a liquidation over the debtor's objection.
2. 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. (correct answer)
3. A cram down reduces the principal amount of all secured debts to their collateral value.
4. A cram down forces shareholders to accept immediate termination of their equity interests.

Explanation: 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.

Question 11

1. Insolvency means the debtor is unable to make any current payment.
2. Insolvency means the debtor's liabilities exceed the fair market value of all assets minus any exempt assets.
3. Insolvency (balance sheet test) means the sum of the debtor's debts is greater than all of the debtor's property at fair valuation, excluding exempt property and fraudulent transfers. (correct answer)
4. Insolvency means the debtor has missed more than three consecutive loan payments.

Explanation: Under 11 U.S.C. Section 101(32), 'insolvent' means a financial condition such that the sum of an entity's debts is greater than all of its property at a fair valuation. For an individual, this excludes exempt property and property transferred with actual intent to defraud. For a partnership, it also excludes partners' general partner interests. This is the balance sheet test. There is also an equitable insolvency test (inability to pay debts as they come due), but the Code's primary definition is balance sheet based. Answer A describes equitable insolvency. Answer B partially states the Code but mischaracterizes by requiring 'minus exempt assets' - the correct Code definition excludes exempt property in individual cases. Answer D is a missed payment standard, not the legal definition.

Question 12

1. The entire claim is treated as unsecured.
2. The entire claim is secured at the full amount owed.
3. The secured portion is extinguished and only the deficiency remains.
4. 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. (correct answer)

Explanation: 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.

Question 13

1. Only assets the debtor lists on the bankruptcy schedules.
2. 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. (correct answer)
3. Only real property and bank accounts.
4. Only property located within the United States.

Explanation: 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.

Question 14

1. Medical bills from a hospital emergency visit.
2. Student loan debts, unless excepting them from discharge would cause undue hardship to the debtor and dependents. (correct answer)
3. Credit card debt from general consumer purchases.
4. Unsecured personal loans from a bank.

Explanation: Section 523 of the Bankruptcy Code enumerates debts that are not dischargeable. Student loans are non-dischargeable under Section 523(a)(8) unless excepting them from discharge would impose an undue hardship on the debtor and their dependents (the Brunner test or totality of circumstances test in different circuits). Other non-dischargeable debts include: domestic support obligations (alimony, child support), most tax debts, debts from fraud, debts from willful and malicious injury, and criminal restitution. Answers A, C, and D all describe types of unsecured consumer debt that are generally dischargeable in Chapter 7.

Question 15

1. An involuntary petition may be filed against a debtor who is generally not paying their debts as they become due; it requires three or more creditors (or one creditor if there are fewer than twelve) holding unsecured claims totaling at least $20,450 (subject to periodic inflation adjustment). (correct answer)
2. An involuntary petition may be filed by any single creditor regardless of the amount owed.
3. An involuntary petition may be filed against any debtor, including farmers and individuals who have primarily consumer debts.
4. An involuntary petition requires approval of a majority of the debtor's creditors.

Explanation: Under 11 U.S.C. Section 303, an involuntary bankruptcy petition requires: (1) three or more creditors holding aggregate unsecured claims of at least $20,450 (indexed for inflation and adjusted periodically), unless the debtor has fewer than 12 qualifying creditors, in which case one creditor is sufficient; (2) the debtor must be generally not paying undisputed debts as they become due (equitable insolvency). Involuntary petitions are not available against certain entities (farmers, family farmers, and individuals with primarily consumer debts). Answer A is correct. Answer B is incorrect because a single creditor must meet the minimum claim amount and is only sufficient when the debtor has fewer than 12 qualifying creditors. Answer C is incorrect because farmers are exempt from involuntary petitions. Answer D is incorrect because majority creditor approval is not required.

Question 16

1. 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. (correct answer)
2. Creditors who voted against the plan retain all their pre-bankruptcy rights.
3. The plan only binds creditors who affirmatively voted in favor.
4. Confirmation of the plan has no effect on secured creditors.

Explanation: 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.

Question 17

1. Chapter 13 allows the debtor to completely eliminate all debts including student loans and domestic support obligations.
2. 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. (correct answer)
3. Chapter 13 allows the debtor to discharge all debts without any repayment.
4. Chapter 13 is available only to small businesses, not individuals.

Explanation: 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).

Question 18

1. A sale of the debtor's property to the debtor's insiders at below-market prices.
2. A sale that requires approval of all creditors.
3. A sale that automatically voids all claims against the debtor.
4. 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. (correct answer)

Explanation: 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.

Question 19

1. A debtor who remains in control of the business as a fiduciary for creditors after filing for Chapter 11 reorganization, with most of the rights and duties of a bankruptcy trustee, unless a trustee is appointed. (correct answer)
2. A creditor who takes possession of collateral after the debtor files bankruptcy.
3. The bankruptcy court judge who takes possession of the debtor's assets.
4. A trustee appointed by the bankruptcy court to manage the debtor's business.

Explanation: Under 11 U.S.C. Section 1101, in a Chapter 11 case, the debtor typically continues to operate the business as a 'debtor in possession' (DIP) rather than having a trustee appointed. The DIP has nearly all the powers and duties of a trustee, is obligated to manage the estate in the best interests of creditors and the estate, and must obtain court approval for transactions outside the ordinary course of business. Answer B is incorrect because the DIP is the debtor, not a creditor. Answer C is incorrect because judges do not take possession of assets. Answer D describes a trustee, which is a different role (appointed in Chapter 7 cases and sometimes in Chapter 11).

Question 20

1. All unsecured creditors share equally in the remaining assets.
2. Trade creditors are paid first, then tax claims, then domestic support obligations.
3. Priority unsecured creditors (domestic support obligations, wages, taxes, etc.) are paid in the statutory priority order before general unsecured creditors receive anything. (correct answer)
4. General unsecured creditors are paid before priority creditors to encourage trade credit.

Explanation: 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.