Certified Bankruptcy Specialist (CBS) — Questions and Answers

Question 1: When evaluating a distressed company's restructuring viability, what does 'liquidity runway' measure?

The number of months before debt maturities accelerate
The grace period before interest payments trigger default
The period of time the company can continue operations given its current cash position and projected cash burn rate (Correct answer)
The time remaining on the company's lease agreements

Correct answer: The period of time the company can continue operations given its current cash position and projected cash burn rate

Liquidity runway measures how long a distressed company can sustain operations before exhausting cash, which directly determines the urgency and type of restructuring action needed.

Question 2: After a Chapter 7 discharge, a debtor wants to purchase a home. What is the typical FHA loan waiting period from the discharge date?

2 years (Correct answer)
3 years
4 years
1 year

Correct answer: 2 years

FHA guidelines generally require a 2-year waiting period after Chapter 7 discharge before a borrower qualifies for an FHA-insured mortgage.

Question 3: Under Chapter 11, what is the voting threshold required for a class of creditors to accept a reorganization plan?

A simple majority in both amount and number of claims voting
At least two-thirds in amount and more than one-half in number of allowed claims voting (Correct answer)
Three-fourths in amount and two-thirds in number of claims voting
Unanimous consent of all creditors within the class

Correct answer: At least two-thirds in amount and more than one-half in number of allowed claims voting

Under § 1126(c), a class of claims accepts a plan when holders of at least two-thirds in amount and more than one-half in number of allowed claims actually voting approve it.

Question 4: When a Chapter 11 reorganized debtor emerges from bankruptcy, how are pre-petition tax attributes such as NOLs typically treated?

They are permanently forfeited upon confirmation of the reorganization plan
They are reduced by the amount of COD income excluded from gross income during the bankruptcy case (Correct answer)
They are fully preserved and available to the reorganized entity without any reduction
They are auctioned off to creditors as part of the plan of reorganization

Correct answer: They are reduced by the amount of COD income excluded from gross income during the bankruptcy case

Under IRC Section 108(b), pre-petition tax attributes including NOL carryforwards must be reduced by the excluded COD income, reducing future tax benefits in exchange for the upfront exclusion.

Question 5: When a Chapter 11 plan is confirmed, what effect does confirmation have on pre-confirmation claims?

Confirmation discharges the debtor from all pre-confirmation debts except as provided in the plan (Correct answer)
Confirmation eliminates only secured claims; unsecured claims survive indefinitely
Confirmation does not affect pre-petition claims until all plan payments are made
Confirmation automatically pays all allowed claims from estate funds

Correct answer: Confirmation discharges the debtor from all pre-confirmation debts except as provided in the plan

Under § 1141(d), plan confirmation generally discharges the debtor from pre-petition debts, with obligations resting solely on the confirmed plan's terms.

Question 6: A debtor exempts a personal injury settlement under § 522(d)(11)(D). Which portion of the settlement is NOT protected by this exemption?

Compensation for actual bodily injury
Compensation for loss of future earning capacity
Compensation for pain and suffering attributable to lost future wages (Correct answer)
Payment for medical expenses caused by the injury

Correct answer: Compensation for pain and suffering attributable to lost future wages

Section 522(d)(11)(D) exempts compensation for 'actual bodily injury' but courts often exclude portions attributable to economic losses like lost wages or earning capacity.

Question 7: What happens when errors are discovered in Asset Valuation & Exemptions for Certified Bankruptcy Specialist?

Investigate, correct, document, and implement preventive measures (Correct answer)
Blame others
Ignore them
Wait until audit

Correct answer: Investigate, correct, document, and implement preventive measures

Errors must be promptly investigated, corrected, documented, and followed by measures to prevent recurrence.

Question 8: How does the automatic stay affect IRS tax collection activities after a bankruptcy filing?

The automatic stay temporarily halts most IRS collection actions including levies, garnishments, and property seizures (Correct answer)
The automatic stay only limits state tax collection but not federal IRS actions
The automatic stay has no effect on any IRS collection activities
The automatic stay permanently and irrevocably prevents the IRS from collecting taxes

Correct answer: The automatic stay temporarily halts most IRS collection actions including levies, garnishments, and property seizures

The automatic stay under 11 U.S.C. § 362 generally halts IRS collection activities, though the IRS may seek relief from the stay or continue certain permitted actions such as tax audits and assessments.

Question 9: Under the Bankruptcy Code, what is the treatment of reclamation claims by sellers of goods to a Chapter 11 debtor?

Sellers must file an adversary proceeding within 20 days to reclaim goods
Sellers have no reclamation rights once bankruptcy is filed
Sellers may reclaim any goods delivered within 90 days pre-petition
Sellers may reclaim goods delivered within 45 days before the petition date if the debtor was insolvent at delivery (Correct answer)

Correct answer: Sellers may reclaim goods delivered within 45 days before the petition date if the debtor was insolvent at delivery

Under § 546(c), sellers can reclaim goods if written demand is made within 45 days of delivery and the debtor was insolvent when the goods were received.

Question 10: A Chapter 11 debtor seeks to pay pre-petition wages to key employees before a plan is confirmed. What mechanism allows this?

Automatic payment under the automatic stay exception for wage claims
Approval by the U.S. Trustee without a court hearing
A 'first day' wage motion seeking court authority to pay critical employee wages as administrative expenses (Correct answer)
Payment is prohibited until the plan is confirmed and becomes effective

Correct answer: A 'first day' wage motion seeking court authority to pay critical employee wages as administrative expenses

Debtors routinely file first day motions seeking authority to pay pre-petition wages, relying on the court's § 105(a) equitable powers and the critical vendor doctrine.

Question 11: What happens when errors are discovered in Business Bankruptcy & Reorganization for Certified Bankruptcy Specialist?

Ignore them
Blame others
Wait until audit
Investigate, correct, document, and implement preventive measures (Correct answer)

Correct answer: Investigate, correct, document, and implement preventive measures

Errors must be promptly investigated, corrected, documented, and followed by measures to prevent recurrence.

Question 12: Under § 522(o), a debtor's homestead exemption may be reduced if the debtor converted non-exempt assets into homestead equity within ten years with intent to hinder, delay, or defraud creditors. What must the trustee prove?

That the conversion occurred within two years before filing
That the creditors received no value from the converted assets
Actual fraudulent intent, not merely constructive fraud (Correct answer)
That the homestead was purchased after the debts arose

Correct answer: Actual fraudulent intent, not merely constructive fraud

Section 522(o) requires actual intent to hinder, delay, or defraud; constructive fraud based solely on insolvency is insufficient.

Question 13: A reorganizing debtor wants to discontinue a product line. The relevant costs in this decision are:

Depreciation on fully paid equipment
Only future avoidable costs and lost revenues (Correct answer)
All historical costs of the product line
Allocated corporate overhead that will be reallocated

Correct answer: Only future avoidable costs and lost revenues

Relevant costs are future, avoidable costs—those that will be eliminated if the segment is dropped—along with any avoidable revenues.

Question 14: Which IRS form does a bankruptcy estate created in an individual Chapter 7 or Chapter 11 case file for its annual income tax return?

Form 990 (Return of Organization Exempt From Income Tax)
Form 1041 (U.S. Income Tax Return for Estates and Trusts) (Correct answer)
Form 1120 (U.S. Corporation Income Tax Return)
Form 1040 (U.S. Individual Income Tax Return)

Correct answer: Form 1041 (U.S. Income Tax Return for Estates and Trusts)

A bankruptcy estate in an individual Chapter 7 or Chapter 11 case files Form 1041 because it is treated as a separate fiduciary entity similar to a trust or estate.

Question 15: In negotiating a cash collateral order with a Chapter 11 debtor, which form of adequate protection is LEAST likely to be accepted by a secured lender?

A replacement lien on post-petition assets
A superpriority administrative claim under § 507(b)
Periodic cash payments equal to the collateral's depreciation
The debtor's promise to maintain the collateral's value (Correct answer)

Correct answer: The debtor's promise to maintain the collateral's value

An unenforceable promise without concrete security is inadequate protection; courts require tangible measures like replacement liens or cash payments.

Question 16: If a trustee successfully avoids a transfer under Section 548, what remedy is typically available under Section 550?

The transferee receives an administrative expense priority claim
The trustee may recover the property transferred or its value from the transferee (Correct answer)
The debtor is automatically denied a discharge
The court imposes criminal penalties on the transferee

Correct answer: The trustee may recover the property transferred or its value from the transferee

Section 550 allows the trustee to recover the transferred property itself or its monetary equivalent from the initial transferee or certain subsequent transferees.

Question 17: In Chapter 11, what is the role of the Official Committee of Unsecured Creditors (UCC)?

To serve as the court's appointed expert on valuation matters
To replace the debtor in possession as the operator of the business
To represent the interests of general unsecured creditors and participate in plan negotiations (Correct answer)
To approve or reject all DIP financing arrangements

Correct answer: To represent the interests of general unsecured creditors and participate in plan negotiations

The UCC under § 1102 is appointed by the U.S. Trustee and has standing to investigate the debtor, negotiate the plan, and retain professionals at estate expense.

Question 18: A debtor claims a 'tools of the trade' exemption for a laptop used 60% for business and 40% personally. Most courts would:

Require the debtor to surrender the laptop and buy a business-only replacement
Allow the exemption for the full value because business use is predominant (Correct answer)
Deny the exemption entirely because personal use disqualifies it
Prorate the exemption at 60% of the laptop's value

Correct answer: Allow the exemption for the full value because business use is predominant

Most courts allow the tools-of-the-trade exemption when business use is the primary purpose, without prorating for incidental personal use.

Question 19: Which type of debt restructuring involves exchanging existing debt for new debt instruments with different terms?

Debt-for-equity swap
Debt exchange offer (Correct answer)
Debt forgiveness
Subordination agreement

Correct answer: Debt exchange offer

A debt exchange offer replaces existing debt securities with new instruments that typically have modified maturities, interest rates, or principal amounts.

Question 20: Which of the following correctly describes a reaffirmation agreement in Chapter 7?

An agreement to surrender secured collateral to the lender
A new enforceable contract by which the debtor agrees to remain personally liable on a pre-petition debt (Correct answer)
A court order requiring the debtor to pay a priority claim
A creditor's agreement to reduce the principal owed

Correct answer: A new enforceable contract by which the debtor agrees to remain personally liable on a pre-petition debt

A reaffirmation agreement under § 524(c) creates a new personal liability on a pre-petition debt that would otherwise be discharged, subject to court approval and rescission rights.

Question 21: How does the Bankruptcy Code treat post-petition interest on unsecured claims in a solvent Chapter 11 debtor's estate?

Post-petition interest accrues only for creditors holding claims over $1 million
Unsecured creditors in a solvent estate may be entitled to post-petition interest before equity receives a distribution (Correct answer)
Post-petition interest is never allowed on unsecured claims in Chapter 11
Post-petition interest on unsecured claims must be approved by the court annually

Correct answer: Unsecured creditors in a solvent estate may be entitled to post-petition interest before equity receives a distribution

If the estate is solvent, the absolute priority rule and § 726(a)(5) logic require payment of post-petition interest to unsecured creditors before equity holders recover anything.

Question 22: Which of the following best describes 'blockage discount' in bankruptcy asset valuation?

A reduction for minority interest in a closely-held company
A discount reflecting the time needed to obtain regulatory approval for a sale
A discount applied because the asset is illiquid and hard to transfer
A reduction in per-share value when a large block of stock would depress the market if sold at once (Correct answer)

Correct answer: A reduction in per-share value when a large block of stock would depress the market if sold at once

A blockage discount recognizes that selling a large securities position would depress the market price below the quoted per-share value.

Question 23: Which section of the Bankruptcy Code governs the assumption or rejection of executory contracts in Chapter 11?

Section 547
Section 362
Section 365 (Correct answer)
Section 1129

Correct answer: Section 365

Section 365 allows the debtor-in-possession to assume beneficial executory contracts (curing defaults) or reject burdensome ones, treating rejection as a pre-petition breach.

Question 24: A creditor's committee in Chapter 11 is typically composed of:

Only trade creditors, excluding bondholders
The seven largest unsecured creditors willing to serve (Correct answer)
Creditors appointed by the bankruptcy judge
All creditors who filed proofs of claim

Correct answer: The seven largest unsecured creditors willing to serve

Under § 1102, the U.S. Trustee appoints an official committee of unsecured creditors, ordinarily including the seven largest unsecured creditors willing to serve.

Question 25: What is 'cancellation of debt' (COD) income and how does bankruptcy affect it?

A tax credit given to debtors who successfully discharge debt
Income generated by selling assets during the bankruptcy process
A penalty the IRS assesses for filing bankruptcy
Income recognized when a debt is forgiven; bankruptcy provides an exclusion from gross income under IRC Section 108 (Correct answer)

Correct answer: Income recognized when a debt is forgiven; bankruptcy provides an exclusion from gross income under IRC Section 108

COD income arises when a creditor cancels a debt, which the IRS treats as taxable income; however, IRC Section 108(a)(1)(A) excludes COD income from gross income when the discharge occurs in a Title 11 bankruptcy case.

Question 26: What standard governs approval of a Chapter 11 disclosure statement?

It must be certified by an independent auditor as accurate
It must contain adequate information for a hypothetical reasonable investor to make an informed judgment about the plan (Correct answer)
It must be approved by a majority of unsecured creditors before filing
It must contain a liquidation analysis approved by the U.S. Trustee

Correct answer: It must contain adequate information for a hypothetical reasonable investor to make an informed judgment about the plan

Under § 1125(a), a disclosure statement must provide 'adequate information'—enough for a reasonable creditor to evaluate the proposed plan.

Question 27: A Chapter 7 debtor owes $10,000 in domestic support obligations (DSO). How are DSOs treated in bankruptcy?

They are non-dischargeable and hold first priority under § 507(a)(1) (Correct answer)
They are treated as general unsecured claims
They are dischargeable only if incurred more than three years before filing
They are dischargeable if the debtor completes a financial management course

Correct answer: They are non-dischargeable and hold first priority under § 507(a)(1)

DSOs are excepted from discharge under § 523(a)(5) and receive first-priority status under § 507(a)(1)(A), meaning they are paid before all other unsecured claims.

Question 28: For Chapter 7 asset cases, the trustee must file a report of no distribution (no-asset report) or administer assets. What triggers an asset case designation?

The trustee identifies non-exempt assets that are not burdensome and have realizable value (Correct answer)
Any asset listed on Schedule A/B regardless of exemption status
Assets exceeding $1,000 in aggregate non-exempt value
Creditor claims totaling more than the debtor's exempt property

Correct answer: The trustee identifies non-exempt assets that are not burdensome and have realizable value

A case becomes an asset case when the trustee finds property that is not fully exempt, is not burdensome, and has sufficient value to justify administration.

Question 29: What is IRS Form 982 used for in the context of a bankruptcy discharge?

To report the exclusion of COD income from gross income and document the corresponding reduction of tax attributes (Correct answer)
To apply for innocent spouse relief from joint tax liability after bankruptcy
To request an IRS audit reconsideration following a bankruptcy discharge
To file the bankruptcy estate's annual income tax return with the IRS

Correct answer: To report the exclusion of COD income from gross income and document the corresponding reduction of tax attributes

Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) is attached to the debtor's tax return to claim the Title 11 exclusion and report the mandatory reduction of tax attributes like NOLs.

Question 30: When a CBS specialist uses regression analysis to separate mixed costs into fixed and variable components, the dependent variable is typically:

The total cost being analyzed (Correct answer)
The number of units produced
The overhead rate per unit
The activity driver (e.g., machine hours)

Correct answer: The total cost being analyzed

In least-squares regression for cost estimation, total cost is the dependent variable (Y) and the activity measure is the independent variable (X).

Certified Bankruptcy Specialist (CBS)

The CBS credential, awarded by the American Board of Certification (ABC), certifies attorneys in consumer bankruptcy, business bankruptcy, or creditors' rights law. The exam tests expertise in bankruptcy law and procedures, debtor-creditor rights, asset valuation, exemptions, reorganization plans, and tax implications.

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35 min

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60%

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