IFA IFA Insolvency & Financial Restructuring 1

Question 1

Which test for insolvency focuses on whether a company's total liabilities exceed its total assets?

Accepted Answer

Balance sheet test

Answer

The balance sheet test determines insolvency by comparing total liabilities against total assets; if liabilities exceed assets, the entity is technically insolvent.

Question 2

Under Chapter 7 of the US Bankruptcy Code, what happens to the debtor's non-exempt assets?

Accepted Answer

Assets are liquidated by a trustee to pay creditors

Answer

In Chapter 7 bankruptcy, a court-appointed trustee liquidates the debtor's non-exempt assets and distributes the proceeds to creditors according to statutory priority.

Question 3

What is a 'preference payment' in the context of insolvency law?

Accepted Answer

A payment made to a creditor before insolvency that may be reversed by a trustee

Answer

A preference payment is a transfer made to a creditor within 90 days before bankruptcy (one year for insiders) that may be avoided by the trustee to ensure equitable distribution among all creditors.

Question 4

What is the 'automatic stay' that takes effect immediately when a bankruptcy petition is filed?

Accepted Answer

A temporary freeze on most collection actions and lawsuits against the debtor

Answer

The automatic stay immediately halts most collection efforts, foreclosures, and creditor actions against the debtor upon filing a bankruptcy petition, providing breathing room for the proceedings.

Question 5

In a Chapter 7 liquidation, which class of creditors is paid FIRST from the estate's assets?

Accepted Answer

Secured creditors, to the extent of their collateral value

Answer

Secured creditors are paid first from the proceeds of the specific collateral securing their claims, up to the value of that collateral, before any unsecured or equity claims.

(IFA) Institute of Financial Accountants Certification Practice Test

(IFA) Institute of Financial Accountants Certification Practice Test

IFA IFA Insolvency & Financial Restructuring 1