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CA CLS Bankruptcy study materials
CA CLS Bankruptcy study resources

CA CLS Bankruptcy practice questions

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Question 1Bankruptcy

Under the Bankruptcy Code, which chapter governs the liquidation of a debtor's nonexempt assets and distribution of proceeds to creditors?

  1. Chapter 9
  2. Chapter 11
  3. Chapter 7 Correct answer.
  4. Chapter 13

Explanation

Chapter 7 is the liquidation chapter: a trustee collects and sells the debtor's nonexempt property and distributes the proceeds to creditors according to the statutory priority scheme. Chapters 11 and 13 are rehabilitative, and Chapter 9 applies to municipalities.

Question 2Bankruptcy

In a Chapter 7 case, the bankruptcy estate is created at the moment of filing and consists primarily of:

  1. Only property that the trustee physically reduces to possession
  2. Only property the debtor schedules on the petition
  3. All legal and equitable interests of the debtor in property as of the commencement of the case Correct answer.
  4. Property acquired by the debtor after the case is closed

Explanation

Section 541(a) defines the estate broadly to include all legal and equitable interests of the debtor in property as of the commencement of the case, wherever located and by whomever held. Scheduling is a disclosure duty but does not limit the estate's scope.

Question 3Bankruptcy

Which of the following is the primary function of the automatic stay under section 362?

  1. It discharges the debtor's prepetition debts immediately upon filing
  2. It converts a Chapter 13 case to Chapter 7 automatically
  3. It transfers ownership of the debtor's assets to creditors
  4. It freezes collection actions against the debtor and property of the estate during the case Correct answer.

Explanation

The automatic stay arises by operation of law on the petition date and enjoins a broad range of creditor acts, including collection, foreclosure, and lien enforcement, against the debtor and estate property. Its purpose is to give the debtor breathing room and preserve the estate for orderly administration.

Question 4Bankruptcy

A debtor's state-law exemptions are most relevant in a Chapter 7 case because they:

  1. Establish the priority of tax claims
  2. Determine which debts are discharged
  3. Set the interest rate paid to secured creditors
  4. Determine which property the debtor may keep free of the trustee's liquidation Correct answer.

Explanation

Exemptions define the property the debtor can retain and shield from liquidation, with section 522 allowing a choice between state and federal exemption schemes subject to state opt-out rules. They do not affect dischargeability, interest rates, or claim priority.

Question 5Bankruptcy

Which creditor holds a claim secured by a lien on estate property to the extent of the value of the creditor's interest in that property?

  1. A general unsecured creditor
  2. A priority unsecured creditor
  3. An administrative claimant
  4. A secured creditor Correct answer.

Explanation

Under section 506(a), a claim is secured to the extent of the value of the creditor's interest in the estate's property and unsecured to the extent it exceeds that value. General and priority unsecured creditors hold no lien and therefore no secured status.

Question 6Bankruptcy

The Chapter 7 trustee's avoiding powers under section 547 allow recovery of:

  1. Only transfers to insiders made at any time
  2. Preferential transfers made within the statutory lookback period before filing Correct answer.
  3. Any transfer made within one year before filing
  4. Transfers made after the petition date only

Explanation

Section 547 permits avoidance of preferential transfers made within 90 days before filing, extended to one year for transfers to insiders, when the other elements of a preference are satisfied. The lookback is measured from the petition date.

Question 7Bankruptcy

Which of the following debts is generally excepted from discharge under section 523(a)(1)?

  1. A medical bill for emergency treatment
  2. A tax debt for which a return was never filed Correct answer.
  3. A personal loan from a friend
  4. A credit card balance incurred for household goods

Explanation

Section 523(a)(1) excepts certain tax debts from discharge, including taxes for which the debtor failed to file a required return. Ordinary consumer debts such as credit cards, personal loans, and medical bills are generally dischargeable.

Question 8Bankruptcy

A Chapter 13 debtor must generally propose a plan providing for payments over a period of:

  1. Three to five years, subject to the debtor's income and the applicable commitment period Correct answer.
  2. Exactly 60 months in every case
  3. No more than 12 months
  4. An indefinite period set solely by the trustee

Explanation

Section 1322(d) limits plan duration to three years, or up to five years if the debtor's current monthly income exceeds the state median, and the applicable commitment period frames the minimum. Plans are not fixed at exactly 60 months or 12 months.

Question 9Bankruptcy

A debtor files Chapter 7 with $40,000 in credit card debt, a car loan secured by a vehicle worth $18,000 with a $15,000 balance, and $5,000 in a bank account claimed as exempt. The trustee's most likely course is to:

  1. Take no action against exempt funds and evaluate nonexempt assets for administration Correct answer.
  2. Liquidate the vehicle and pay the lender in full
  3. Administer the exempt bank account and distribute it to unsecured creditors
  4. Dismiss the case because the debtor has secured debt

Explanation

Exempt property is shielded from liquidation, so the trustee cannot reach the claimed exempt bank account absent a successful objection. The trustee instead examines nonexempt assets and secured collateral, and secured debt alone is no ground for dismissal.

Question 10Bankruptcy

A creditor repossesses the debtor's truck two days after the petition date without seeking relief from stay. The creditor's action is:

  1. Valid because repossession is a self-help remedy outside the stay
  2. Void or voidable as a willful violation of the automatic stay Correct answer.
  3. Valid if the creditor later files a proof of claim
  4. Permitted if the debtor is behind on payments

Explanation

Acts taken in violation of the automatic stay are generally void or voidable, and willful violations expose the creditor to actual damages, costs, attorney's fees, and possibly punitive damages under section 362(k). Self-help does not exempt a creditor from the stay.

Question 11Bankruptcy

Within 60 days after the first meeting of creditors in a Chapter 7 case, a creditor must ordinarily:

  1. Object to the debtor's exemptions
  2. Record a lien against estate property
  3. File a proof of claim unless the claim is scheduled and not listed as disputed, contingent, or unliquidated Correct answer.
  4. File a motion to lift the stay

Explanation

Rule 3002 requires a creditor to file a proof of claim within 60 days after the first meeting of creditors, but a claim scheduled by the debtor and not listed as disputed, contingent, or unliquidated is deemed filed. Stay relief, lien recording, and exemption objections are separate matters with their own timing.

Question 12Bankruptcy

The debtor transferred a $25,000 sports car to a relative for $2,000 six months before filing Chapter 7 while insolvent. The trustee's strongest theory is:

  1. Subordination under section 510
  2. Fraudulent transfer under section 548 Correct answer.
  3. Setoff under section 553
  4. Preference under section 547

Explanation

Section 548 permits avoidance of transfers made with actual intent to hinder, delay, or defraud creditors, or constructively fraudulent transfers for less than reasonably equivalent value while insolvent. Receiving $2,000 for a $25,000 car while insolvent fits the constructive fraud framework.

Question 13Bankruptcy

Which party has the burden of proving that a debt is nondischargeable under section 523(a)?

  1. The United States Trustee, beyond a reasonable doubt
  2. The debtor, by a preponderance of the evidence
  3. The trustee, by clear and convincing evidence
  4. The creditor, by a preponderance of the evidence Correct answer.

Explanation

Exceptions to discharge are construed narrowly, and the creditor asserting one must prove the elements by a preponderance of the evidence in an adversary proceeding. The debtor does not bear that burden, and the trustee and U.S. Trustee are not the asserting parties.

Question 14Bankruptcy

A Chapter 13 debtor's plan proposes to pay general unsecured creditors 10% of their claims while the debtor's projected disposable income would fund 40%. The bankruptcy court is most likely to:

  1. Confirm the plan because unsecured creditors are treated equally
  2. Reject confirmation unless the plan commits the projected disposable income for the applicable commitment period Correct answer.
  3. Confirm the plan because Chapter 13 has no disposable income requirement
  4. Convert the case to Chapter 7 sua sponte

Explanation

Section 1325(b) requires that, if the trustee or an unsecured creditor objects, the plan pay unsecured claims in full or commit all projected disposable income for the applicable commitment period. Equal treatment among unsecured creditors does not cure an insufficient commitment of income.

Question 15Bankruptcy

A debtor seeks to redeem a vehicle in Chapter 7 by paying the secured creditor the allowed amount of its secured claim. Redemption under section 722 requires that the property be:

  1. Real property used as the debtor's residence
  2. Tangible personal property intended primarily for personal, family, or household use and exempt Correct answer.
  3. Any property subject to a lien, including business inventory
  4. Property worth less than the creditor's claim only

Explanation

Section 722 allows an individual debtor to redeem tangible personal property intended primarily for personal, family, or household use from a lien securing a dischargeable consumer debt by paying the allowed secured claim. It applies to exempt property and does not extend to real estate or business inventory.

Question 16Bankruptcy

A landlord holds a prepetition security deposit and the debtor owes prepetition rent. After the petition, the landlord refuses to return the deposit. The trustee's best response is to:

  1. Seek dismissal of the case for cause
  2. Assert that the deposit is estate property and that the landlord's retention violates the stay Correct answer.
  3. File a proof of claim on the debtor's behalf
  4. Treat the deposit as a postpetition administrative claim

Explanation

Security deposits held by a landlord are generally property of the estate, and retaining them postpetition without stay relief interferes with estate property. The trustee can demand turnover under section 542 and pursue stay remedies.

Question 17Bankruptcy

Which of the following best describes the treatment of a claim secured solely by property whose value is less than the claim amount?

  1. Entirely unsecured with no lien
  2. Fully secured for the entire claim
  3. Excluded from the estate entirely
  4. Secured to the value of the collateral and unsecured for the deficiency Correct answer.

Explanation

Section 506(a) bifurcates an undersecured claim into a secured claim equal to the collateral value and an unsecured claim for the deficiency. The lien remains on the property, but the creditor's secured recovery is capped by value.

Question 18Bankruptcy

A debtor received a $10,000 cash advance on a credit card 30 days before filing Chapter 7 with no intent to repay. The creditor objects to discharge of that debt. The strongest ground is:

  1. Section 523(a)(8) student loan hardship
  2. Section 523(a)(5) domestic support obligation
  3. Section 523(a)(9) injury from intoxicated driving
  4. Section 523(a)(2) fraud or false pretenses Correct answer.

Explanation

Section 523(a)(2)(A) excepts debts obtained by false pretenses, false representation, or actual fraud, and section 523(a)(2)(C) presumes fraud for luxury goods or cash advances over the statutory threshold obtained shortly before filing. The student loan, domestic support, and intoxicated driving exceptions are inapplicable.

Question 19Bankruptcy

A debtor's Chapter 7 case is closed without discharge because the debtor failed to complete the required personal financial management course. The debtor may:

  1. File a motion to reopen and complete the course to obtain a discharge Correct answer.
  2. Automatically receive a discharge when the case closes
  3. Convert the case to Chapter 11 without further steps
  4. Compel the trustee to certify completion

Explanation

Completion of an approved instructional course in personal financial management is a condition of discharge under section 727(a)(11). A debtor who failed to complete it may move to reopen the case and cure the deficiency.

Question 20Bankruptcy

A creditor received a $15,000 payment from the debtor 45 days before the Chapter 7 petition, on account of an antecedent debt, while the debtor was insolvent, and the payment enabled the creditor to receive more than it would in a Chapter 7 distribution. The trustee may avoid the transfer as a preference unless:

  1. The payment was made in the ordinary course of business or under other section 547(c) defenses Correct answer.
  2. The creditor is an individual rather than an entity
  3. The debtor had at least one other creditor
  4. The creditor is a secured creditor with a perfected lien

Explanation

Section 547(b) establishes the preference elements, but section 547(c) provides defenses, including payments made in the ordinary course of business or according to ordinary business terms. The trustee bears the burden of proving the elements, and the creditor may invoke an affirmative defense.

Question 21Bankruptcy

A debtor's wholly owned LLC holds a valuable contract. The debtor seeks to reject the contract as executory. Which statement best reflects the governing analysis?

  1. Rejection requires court approval, and the counterparty's damages are treated as a prepetition claim Correct answer.
  2. The debtor may reject any contract at will, and rejection is treated as a breach occurring immediately before the petition
  3. Rejection is unavailable to debtors in Chapter 7
  4. Rejection automatically terminates the contract without any claim for damages

Explanation

Section 365 permits the trustee or debtor in possession to assume or reject executory contracts and unexpired leases, subject to court approval, and section 365(g) treats rejection as a breach immediately before the petition date. The counterparty then holds a prepetition claim for damages.

Question 22Bankruptcy

An individual debtor in Chapter 7 has primarily consumer debts and the United States Trustee moves to dismiss for abuse under section 707(b). Which factor is most relevant to the means test?

  1. The number of creditors listed on the schedules
  2. The debtor's current monthly income compared with the state median and allowed expense deductions Correct answer.
  3. Whether the debtor owns a home
  4. The debtor's credit score at the time of filing

Explanation

The means test compares current monthly income to the applicable state median and, for above-median debtors, deducts allowed expenses to determine whether a presumption of abuse arises. Credit score, creditor count, and homeownership are not the statutory measures.

Question 23Bankruptcy

A trustee seeks to avoid a lien that the debtor voluntarily granted on exempt household goods within 90 days before filing while insolvent. Which analysis is most accurate?

  1. The lien may be avoidable if it enabled the creditor to receive more than in a Chapter 7 distribution and no section 547(c) defense applies Correct answer.
  2. The lien is automatically valid because the debtor consented to it
  3. The lien is void solely because the debtor is an individual
  4. Liens on exempt property can never be avoided

Explanation

A voluntary lien can be a preferential transfer if it was granted on account of an antecedent debt within the lookback period while the debtor was insolvent and improved the creditor's position relative to a Chapter 7 distribution. Section 547(c) defenses may still apply.

Question 24Bankruptcy

A Chapter 11 debtor proposes a plan that releases claims against a nondebtor third party without the affected creditors' consent. Under current Supreme Court authority, such a nonconsensual third-party release is:

  1. Permitted only if the third party is an insider
  2. Required in every consensual plan
  3. Not permitted in a Chapter 11 plan without the affected parties' consent Correct answer.
  4. Permitted whenever the plan is confirmed by an impaired class

Explanation

In Harrington v. Purdue Pharma (2024), the Supreme Court held that the Bankruptcy Code does not authorize a Chapter 11 plan to release claims against nondebtors without the consent of the affected claimants. Consensual releases remain permissible.

Question 25Bankruptcy

A creditor holds a claim secured by a mortgage on the debtor's principal residence. In Chapter 13, the debtor seeks to strip off the lien because the residence is worth less than the senior mortgage balance. Which statement is correct?

  1. The debtor may strip the lien only if the creditor consents
  2. The debtor may strip off the lien because the residence is undersecured
  3. The lien is automatically void upon filing
  4. Section 1322(b)(2) bars modification of a claim secured only by the debtor's principal residence Correct answer.

Explanation

Section 1322(b)(2) prohibits modification of the rights of a holder of a claim secured only by a security interest in the debtor's principal residence, and the Supreme Court has applied this to bar strip-off of wholly unsecured junior liens in Chapter 13. The antimodification protection does not depend on creditor consent.

Question 26Bankruptcy

Which chapter of the Bankruptcy Code is designed primarily to give an individual debtor a discharge of debts while making regular payments to creditors from future income?

  1. Chapter 13 Correct answer.
  2. Chapter 7
  3. Chapter 15
  4. Chapter 11

Explanation

Chapter 13 is the adjustment-of-debts chapter for individuals with regular income, who propose a plan to pay creditors over time and receive a discharge on completion. Chapter 7 is liquidation, Chapter 11 is reorganization for businesses and larger debtors, and Chapter 15 governs cross-border insolvency.

Question 27Bankruptcy

The commencement of a bankruptcy case creates an estate consisting of which property?

  1. Only property the debtor schedules on the official forms
  2. Only tangible personal property located in the debtor's home state
  3. All legal and equitable interests of the debtor in property as of the petition date Correct answer.
  4. Property acquired by the debtor after the case is closed

Explanation

Section 541(a) provides that the estate comprises all legal and equitable interests of the debtor in property wherever located and by whomever held, as of the commencement of the case. Scheduling is a disclosure duty, not the measure of the estate, and post-closing acquisitions generally fall outside it.

Question 28Bankruptcy

In a Chapter 7 case, which party is appointed to administer the estate, collect and liquidate nonexempt property, and distribute proceeds to creditors?

  1. The creditors' committee
  2. The case trustee Correct answer.
  3. The debtor in possession
  4. The United States Trustee

Explanation

The case trustee is the private fiduciary appointed to administer the Chapter 7 estate, reduce assets to money, and make distributions under section 726. The United States Trustee is a government official who supervises the system rather than administering individual estates.

Question 29Bankruptcy

Which of the following is an automatic consequence of filing a voluntary bankruptcy petition?

  1. The debtor's nonexempt assets vest in the trustee upon filing
  2. The debtor's employer must continue paying wages to the trustee
  3. All prepetition debts are immediately discharged
  4. An automatic stay arises that halts most collection actions against the debtor Correct answer.

Explanation

Section 362 imposes the automatic stay upon the filing of a petition, enjoining most acts to collect prepetition debts or enforce liens against estate property. Discharge comes later, and vesting of assets depends on the chapter and the trustee's administration.

Question 30Bankruptcy

Which schedule requires the debtor to list all creditors, the amount owed, and whether each claim is secured, unsecured, or priority?

  1. Schedule D
  2. Schedule E/F Correct answer.
  3. Schedule A/B
  4. Schedule I

Explanation

Schedule E/F lists creditors holding unsecured claims, including both priority and nonpriority claims, with amounts and character indicated. Schedule D covers secured creditors, Schedule A/B covers assets, and Schedule I reports income.

Question 31Bankruptcy

Which of the following best states the effect of a discharge in Chapter 7?

  1. It transfers ownership of the debtor's exempt property to creditors
  2. It voids all liens on the debtor's property
  3. It permanently bars creditors from ever contacting the debtor about any debt
  4. It releases the debtor from personal liability on most prepetition debts Correct answer.

Explanation

A discharge releases the individual debtor from personal liability for most prepetition debts and enjoins collection of those debts as personal obligations. It does not extinguish valid liens on property, and it does not reach debts excepted from discharge.

Question 32Bankruptcy

Which of the following claims is entitled to priority treatment under section 507?

  1. A general unsecured claim for a credit card balance
  2. A claim for a personal loan from a friend
  3. A claim for a commercial invoice for goods delivered before the petition
  4. A claim for domestic support obligations Correct answer.

Explanation

Section 507(a)(1) gives first priority to domestic support obligations such as child support and alimony. Ordinary unsecured consumer debts and trade invoices fall into the general unsecured class and share pro rata after priority claims are paid.

Question 33Bankruptcy

A debtor owns a home worth $300,000 subject to a mortgage of $250,000. Which statement best describes the debtor's interest in the home for exemption purposes?

  1. The debtor may exempt the full $300,000 because the home is a residence
  2. The debtor may exempt up to $50,000 of equity, subject to applicable exemption law Correct answer.
  3. The debtor has no exemptible interest because a mortgage exists
  4. The debtor may exempt the mortgage debt itself

Explanation

Exemptions protect the debtor's equity interest in property, measured by value minus liens, up to the amount allowed by the applicable exemption scheme. A debtor cannot exempt more than the equity actually held or the statutory cap, whichever is lower.

Question 34Bankruptcy

A debtor with regular income and unsecured debts of $500,000 files Chapter 13. Which statutory debt limit applies to determine eligibility?

  1. Only the secured debt limit applies
  2. Only the unsecured debt limit applies
  3. No debt limits apply to Chapter 13 eligibility
  4. Both secured and unsecured debt limits apply Correct answer.

Explanation

Section 109(e) conditions Chapter 13 eligibility on both a secured debt ceiling and an unsecured debt ceiling, which are periodically adjusted. A debtor exceeding either limit is ineligible for Chapter 13 absent consent under section 1306 or conversion.

Question 35Bankruptcy

Which of the following is a core function of the first meeting of creditors under section 341?

  1. The bankruptcy judge enters an order of discharge
  2. The automatic stay is lifted for all secured creditors
  3. Creditors vote to elect the trustee in every case
  4. The debtor is examined under oath about assets, liabilities, and financial affairs Correct answer.

Explanation

At the section 341 meeting, the trustee and creditors may examine the debtor under oath regarding the debtor's financial condition, assets, and transactions. The meeting is not a court proceeding, and the judge ordinarily does not attend.

Question 36Bankruptcy

A debtor files Chapter 7 and a creditor holds an unsecured claim of $5,000. After the trustee sells nonexempt assets, the estate has $20,000. Which statement best describes the likely treatment of the creditor's claim?

  1. The creditor receives nothing because unsecured claims are void in bankruptcy
  2. The creditor may collect the full amount directly from the debtor after discharge
  3. The creditor shares pro rata with other general unsecured creditors after priority claims are paid Correct answer.
  4. The creditor receives payment in full before any other unsecured creditor

Explanation

General unsecured creditors share ratably in the estate's remaining assets after secured claims and priority claims are satisfied under section 726. No single unsecured creditor has a right to full payment ahead of others in the same class.

Question 37Bankruptcy

A debtor's Chapter 7 petition lists a pending personal injury lawsuit as an asset. Which statement best describes the trustee's authority over that claim?

  1. The claim is exempt automatically because it is personal to the debtor
  2. The trustee may pursue or settle the claim for the benefit of the estate Correct answer.
  3. The claim must be abandoned to the debtor in every case
  4. The claim remains the debtor's exclusive property and may not be administered

Explanation

A prepetition cause of action is property of the estate under section 541, and the trustee may prosecute or settle it, subject to any exemption the debtor claims in the proceeds. The trustee may abandon property only when it is burdensome or of inconsequential value.

Question 38Bankruptcy

A debtor files Chapter 13 while a foreclosure sale is scheduled for the next day. Which statement best describes the effect of the automatic stay?

  1. The stay applies only after the debtor completes all plan payments
  2. The stay does not apply to foreclosure because the mortgage predates the petition
  3. The stay halts the foreclosure, but the creditor may seek relief from stay for cause Correct answer.
  4. The stay permanently prevents the creditor from ever foreclosing

Explanation

The automatic stay under section 362(a) stops prepetition foreclosure actions upon filing, but a secured creditor may move for relief from stay, which the court grants for cause such as lack of adequate protection. Relief is discretionary and case-specific.

Question 39Bankruptcy

After filing Chapter 7, a debtor acquires an inheritance within 180 days of the petition date. Which statement best describes the treatment of the inheritance?

  1. It is automatically exempt in full
  2. It belongs to the debtor free of the estate because it was acquired postpetition
  3. It is payable directly to the trustee only if the debtor's case is converted
  4. It becomes property of the estate under section 541(a)(5) Correct answer.

Explanation

Section 541(a)(5) brings certain postpetition acquisitions, including inheritances received within 180 days after the petition date, into the estate. The debtor must disclose such acquisitions, and the trustee may administer them subject to any applicable exemption.

Question 40Bankruptcy

A Chapter 7 trustee seeks to avoid a transfer as a preference. Which element is required for the transfer to be avoidable under section 547(b)?

  1. The transfer enabled the creditor to receive more than it would in a Chapter 7 distribution Correct answer.
  2. The transfer was made to an insider only
  3. The transfer occurred more than one year before the petition
  4. The transfer was made with actual intent to hinder creditors

Explanation

Section 547(b) requires, among other elements, that the transfer enable the creditor to receive more than it would receive in a Chapter 7 case. The transfer also must be to or for the benefit of a creditor, on account of an antecedent debt, while the debtor was insolvent, and within the applicable lookback period.

Question 41Bankruptcy

A debtor owns a car worth $12,000 subject to a lien securing $15,000. In Chapter 13, the debtor proposes to pay the creditor $12,000 with interest and treat the remaining $3,000 as unsecured. Which statement best describes this treatment?

  1. The proposal is proper only if the creditor consents in writing
  2. The proposal is improper because undersecured creditors must be paid in full
  3. The proposal is proper because a Chapter 13 plan may bifurcate an undersecured claim into secured and unsecured portions Correct answer.
  4. The proposal is improper because vehicle liens are never subject to modification

Explanation

Section 506(a) allows an allowed claim secured by property to be split into a secured claim up to the value of the collateral and an unsecured claim for the deficiency. Chapter 13 plans may modify most secured claims, subject to the hanging paragraph and antimodification rules that protect certain residential mortgages.

Question 42Bankruptcy

A debtor fails to appear at the section 341 meeting and fails to provide requested tax documents. Which is the most likely consequence?

  1. The court may dismiss the case or deny discharge Correct answer.
  2. The automatic stay is automatically extended indefinitely
  3. The case converts automatically to Chapter 11
  4. The trustee must pay all claims in full

Explanation

Failure to comply with the debtor's duties, including appearing at the meeting of creditors and providing required documents, can lead to dismissal or denial of discharge under sections 707(a), 727(a), and related provisions. Courts may also condition relief on compliance.

Question 43Bankruptcy

A creditor holds a claim of $10,000 secured by a vehicle worth $8,000. The debtor's Chapter 7 trustee sells the vehicle for $8,000. Which statement best describes the secured creditor's recovery from the sale proceeds?

  1. The creditor receives nothing because the vehicle was sold
  2. The creditor receives $10,000 because its claim is secured
  3. The creditor receives $8,000 only if it files a proof of claim within 30 days
  4. The creditor receives $8,000, and the remaining $2,000 is an unsecured claim Correct answer.

Explanation

A secured creditor's lien attaches to the proceeds of the collateral, and its secured claim is limited to the value of the collateral under section 506(a). The deficiency is treated as a general unsecured claim, which may receive a distribution if assets remain.

Question 44Bankruptcy

A debtor's employer owes the debtor $4,000 in unpaid wages earned within 180 days before the petition. Which statement best describes the treatment of that wage claim?

  1. It is payable only from the debtor's exempt property
  2. It is a general unsecured claim with no priority
  3. It is nondischargeable in full
  4. It is entitled to priority under section 507(a)(4) up to the statutory cap Correct answer.

Explanation

Section 507(a)(4) grants priority to allowed unsecured claims for wages, salaries, or commissions earned within 180 days before the petition, up to a statutory cap. Amounts above the cap are general unsecured claims.

Question 45Bankruptcy

A debtor seeks to dismiss her own Chapter 7 case after creditors have objected. Which standard generally governs voluntary dismissal?

  1. The court may dismiss only after notice and a hearing and may deny dismissal if it would prejudice creditors Correct answer.
  2. Dismissal is prohibited once a trustee is appointed
  3. The debtor may dismiss at will before discharge is granted
  4. The court must dismiss on the debtor's request regardless of prejudice

Explanation

Section 707(a) permits dismissal only after notice and a hearing, and courts consider whether dismissal would prejudice creditors or abuse the bankruptcy process. A debtor does not have an absolute right to dismiss a Chapter 7 case.

Question 46Bankruptcy

A creditor received a transfer of the debtor's property within two years before the petition, and the debtor received less than reasonably equivalent value while insolvent. Which avoidance theory is most directly implicated?

  1. Setoff under section 553
  2. Preference under section 547
  3. Reclamation under section 546(c)
  4. Constructive fraudulent transfer under section 548 Correct answer.

Explanation

Section 548 permits avoidance of transfers made within two years before the petition for less than reasonably equivalent value while the debtor was insolvent or left with unreasonably small capital. The theory addresses depletion of the estate without regard to the recipient's intent.

Question 47Bankruptcy

A debtor's Chapter 13 plan proposes to pay a secured creditor's claim over 60 months with interest at the plan rate, while the creditor objects that the plan does not satisfy section 1325(a)(5). Which requirement must the plan satisfy for the creditor to be bound over its objection?

  1. The creditor must receive at least 50% of its total claim
  2. The debtor must surrender all collateral to the creditor
  3. The creditor must approve the plan in writing
  4. The creditor must receive the present value of its secured claim, not less than the amount of the allowed secured claim Correct answer.

Explanation

Section 1325(a)(5) requires that, over a secured creditor's objection, the creditor receive deferred cash payments totaling at least the allowed amount of its secured claim with a present value equal to the value of the collateral. Alternatively, the debtor may surrender the collateral.

Question 48Bankruptcy

Which of the following debts is most likely to be excepted from discharge under section 523(a)(6)?

  1. A debt arising from a willful and malicious injury by the debtor to another entity Correct answer.
  2. A debt for property taxes
  3. A debt for a residential mortgage loan
  4. A debt for a student loan

Explanation

Section 523(a)(6) excepts from discharge debts for willful and malicious injury to another entity or to the property of another. The injury must be both intentional and wrongful, not merely negligent.

Question 49Bankruptcy

A Chapter 7 debtor's case is a no-asset case and the trustee files a report of no distribution. Which statement best describes the effect on creditors' claims?

  1. The case is automatically converted to Chapter 13
  2. Unsecured creditors are not required to file proofs of claim, and the debtor's discharge will release personal liability Correct answer.
  3. Creditors must file proofs of claim within 30 days or lose all rights
  4. All claims are extinguished as of the report date

Explanation

In a no-asset Chapter 7 case, the court typically gives notice that creditors need not file proofs of claim because no distribution is expected. The debtor's discharge still releases personal liability for most dischargeable debts.

Question 50Bankruptcy

A debtor seeks to exempt a watch valued at $5,000 under a state exemption scheme that allows a $1,000 wildcard exemption. The debtor also claims a homestead exemption. Which statement best describes the likely result?

  1. The debtor may exempt the full $5,000 because personal property is always exempt
  2. The debtor may exempt $1,000 of the watch's value, with the remaining $4,000 exposed to the trustee Correct answer.
  3. The debtor may exempt the watch only if the trustee consents
  4. The debtor may not claim any exemption because a homestead exemption was already claimed

Explanation

Exemptions are limited to the dollar amounts allowed by the applicable scheme, and the wildcard exemption applies to the debtor's aggregate interest up to the cap. Amounts above the exemption remain nonexempt estate property available to the trustee.