ADRA Debt Relief Programs & Consumer Options 1 — Questions and Answers
Question 1: Which type of bankruptcy allows an individual to keep certain exempt assets while having most unsecured debts discharged?
- Chapter 11
- Chapter 7 (Correct answer)
- Chapter 13
- Chapter 9
Correct answer: Chapter 7
Chapter 7 bankruptcy is a liquidation process that discharges most unsecured debts while allowing debtors to keep exempt assets such as a primary home (up to a limit), vehicle, and basic household items.
Question 2: A Debt Management Plan (DMP) is typically administered by which type of organization?
- A for-profit debt settlement company
- A nonprofit credit counseling agency (Correct answer)
- The creditor directly
- A federal government agency
Correct answer: A nonprofit credit counseling agency
DMPs are structured repayment plans administered by nonprofit credit counseling agencies, which negotiate reduced interest rates with creditors on the debtor's behalf.
Question 3: What is the typical timeframe for completing a Chapter 13 bankruptcy repayment plan?
- 6 to 12 months
- 1 to 2 years
- 3 to 5 years (Correct answer)
- 7 to 10 years
Correct answer: 3 to 5 years
Chapter 13 repayment plans must be completed within 3 to 5 years, with the length depending on the debtor's income relative to their state's median income.
Question 4: Debt consolidation loans are BEST suited for clients who:
- Have severely damaged credit scores below 580
- Have stable income and credit scores that qualify for a lower interest rate than existing debts (Correct answer)
- Are already in collections on all accounts
- Cannot afford minimum payments on any account
Correct answer: Have stable income and credit scores that qualify for a lower interest rate than existing debts
Debt consolidation loans benefit clients with sufficient creditworthiness to secure a lower interest rate, allowing them to combine multiple debts into one manageable payment at reduced cost.
Question 5: Which debt relief option typically has the MOST negative short-term impact on a client's credit score?
- Enrolling in a Debt Management Plan
- Obtaining a debt consolidation loan
- Debt settlement / negotiating a lump-sum payoff for less than owed (Correct answer)
- Making consistent minimum payments
Correct answer: Debt settlement / negotiating a lump-sum payoff for less than owed
Debt settlement requires accounts to fall severely delinquent before creditors will negotiate, causing major derogatory marks on the credit report and significantly lowering the credit score.
Question 6: Under the CARD Act of 2009, credit card issuers are required to apply payments above the minimum to:
- The balance with the lowest interest rate first
- The balance with the highest interest rate first (Correct answer)
- Equally across all balances
- The newest purchase balance first
Correct answer: The balance with the highest interest rate first
The CARD Act mandates that any payment amount above the minimum must be applied to the balance carrying the highest annual percentage rate, helping consumers pay down the most expensive debt first.
Question 7: Which of the following is a key eligibility requirement to file Chapter 7 bankruptcy?
- The debtor must owe at least $10,000 in unsecured debt
- The debtor must pass the means test showing income below a threshold (Correct answer)
- The debtor must have attempted a DMP first
- The debtor must be employed at the time of filing
Correct answer: The debtor must pass the means test showing income below a threshold
The Chapter 7 means test compares the debtor's average monthly income to the state median; those earning above the median may not qualify for Chapter 7 and may need to file Chapter 13 instead.
ADRA Debt Relief Programs & Consumer Options 1
Which type of bankruptcy allows an individual to keep certain exempt assets while having most unsecured debts discharged?