CCP Bankruptcy & Insolvency in Credit Management 2 — Questions and Answers
Question 1: The bankruptcy 'means test' introduced by BAPCPA 2005 is primarily used to:
- Determine whether a business can reorganize under Chapter 11
- Restrict individual debtors with higher incomes from filing Chapter 7 liquidation (Correct answer)
- Calculate the debtor's administrative expense obligations
- Establish the priority of secured versus unsecured claims
Correct answer: Restrict individual debtors with higher incomes from filing Chapter 7 liquidation
The means test compares the debtor's income to the state median; if income exceeds the median and the test shows sufficient disposable income, the debtor may be pushed into Chapter 13 rather than Chapter 7.
Question 2: What is a 'fraudulent transfer' in bankruptcy law?
- Any payment made to a creditor within 90 days of filing
- A pre-petition transfer made with intent to defraud creditors, or made for less than reasonably equivalent value while insolvent (Correct answer)
- A transfer of assets to a secured creditor after the automatic stay is in place
- A payment to an insider creditor within one year of filing
Correct answer: A pre-petition transfer made with intent to defraud creditors, or made for less than reasonably equivalent value while insolvent
A fraudulent transfer is one made either with actual intent to hinder or defraud creditors, or constructively fraudulent (debtor was insolvent and received less than fair value), and is recoverable by the trustee.
Question 3: In Chapter 11 bankruptcy, 'debtor in possession' (DIP) financing refers to:
- The existing secured lenders retaining their pre-petition collateral priority
- New financing obtained by the debtor after filing that may be granted super-priority status (Correct answer)
- Funds held in trust by the debtor for creditor distribution
- A government-sponsored loan program for bankrupt small businesses
Correct answer: New financing obtained by the debtor after filing that may be granted super-priority status
DIP financing is post-petition credit extended to a Chapter 11 debtor, and the court can grant the DIP lender super-priority administrative expense status or priming liens to encourage lenders to provide needed operating capital.
Question 4: A 'cramdown' in Chapter 11 proceedings allows the court to:
- Force the debtor to accept a liquidation plan instead of reorganization
- Confirm a reorganization plan over the objection of a dissenting class of creditors (Correct answer)
- Reduce the trustee's compensation to save estate funds
- Subordinate an insider creditor's claim to general unsecured claims
Correct answer: Confirm a reorganization plan over the objection of a dissenting class of creditors
A cramdown permits the bankruptcy court to confirm a plan of reorganization even if one or more classes of creditors reject it, provided the plan meets certain statutory fairness requirements.
Question 5: For a non-insider creditor, what is the standard look-back period during which the bankruptcy trustee can recover a preference payment?
- 30 days
- 60 days
- 90 days (Correct answer)
- 1 year
Correct answer: 90 days
The Bankruptcy Code allows the trustee to avoid and recover preferential transfers made to non-insider creditors within 90 days before the petition filing date.
Question 6: An 'involuntary bankruptcy' petition can be filed by creditors against a debtor when:
- The debtor has committed fraud against creditors
- Three or more unsecured creditors with aggregate claims over a statutory threshold file, and the debtor is generally not paying debts as they come due (Correct answer)
- The debtor defaults on a secured loan and the lender accelerates the debt
- A state court appoints a receiver to manage the debtor's assets
Correct answer: Three or more unsecured creditors with aggregate claims over a statutory threshold file, and the debtor is generally not paying debts as they come due
Creditors can force an involuntary bankruptcy under Chapter 7 or 11 by filing a petition with at least three unsecured creditors (or one if fewer than 12 creditors exist) holding non-contingent claims meeting the threshold, and showing the debtor is generally not paying undisputed debts.
Question 7: Under the absolute priority rule in Chapter 11, which of the following must occur before equity holders can receive any distribution?
- All administrative expenses must be paid within 30 days of plan confirmation
- Each senior class of creditors must be paid in full or consent to different treatment (Correct answer)
- The debtor must provide a 5-year cash flow projection approved by the court
- Unsecured creditors must vote in favor of the plan by at least 75%
Correct answer: Each senior class of creditors must be paid in full or consent to different treatment
The absolute priority rule requires that senior creditor classes be paid in full (or consent to lesser treatment) before any junior class or equity holders receive value under the reorganization plan.
CCP Bankruptcy & Insolvency in Credit Management 2
The bankruptcy 'means test' introduced by BAPCPA 2005 is primarily used to: