Bankruptcy and Insolvency
The Bankruptcy and Insolvency domain tests how the U.S. Bankruptcy Code allocates control, value, and risk from petition through plan or discharge. Expect questions on chapter eligibility, the estate, the automatic stay, avoiding powers, claim priority, Chapter 11 governance, and confirmation. The exam rewards precise element-by-element analysis rather than general restructuring intuition.
Core rules
- Filing creates an estate under §541 and triggers the §362 automatic stay, which suspends collection, foreclosure, and most litigation; it does not extinguish valid liens.
- Chapter 7 uses a trustee and liquidation; Chapter 11 keeps the debtor in possession under §§1107–1108; Chapter 13 requires regular income and statutory debt limits; Chapter 12 covers family farmers and fishers.
- Section 507 priorities (administrative, employee wage, tax, and others) rank ahead of general unsecured claims; secured claims are limited to collateral value under §506.
- Avoidance: §547 preferences require a transfer of the debtor’s interest, to or for a creditor, on antecedent debt, while insolvent, within 90 days (one year for insiders), enabling more than in Chapter 7. §548 reaches fraudulent transfers; §544 allows trustee status.
- Chapter 11 confirmation requires §1129(a) compliance-good faith, best interests, feasibility-and, if a class rejects, cramdown under §1129(b) subject to absolute priority.
Worked example
A vendor receives $50,000 cash 60 days before filing on an antecedent debt. The debtor was insolvent, and in a Chapter 7 the vendor would receive 20%, or $10,000. The transfer is preferential; the estate may avoid $50,000 − $10,000 = $40,000, not the full payment. The vendor could assert a §547(c) defense, such as ordinary course or subsequent new value, if facts support it.
Traps
Do not treat the stay as voiding liens; secured creditors may seek relief or adequate protection. Do not apply the 90-day period to insiders. Do not assume a DIP is a separate trustee. Do not stop at creditor acceptance: best interests, feasibility, and priority rules still apply. Administrative priority does not mean immediate cash payment.