CPA Exam (REG R8) Detailed Questions and Expert
Answers
Bankruptcy - ANS 6 types of bankruptcy cases under fed law: ch 7 liquidation, ch 9
muni debt adjustmt, ch 11 reorg, ch 12 fam farmers w/ reg inc, ch 13 adjustmt of
debts of indivs w/ reg inc, and ch 15 ancillary and other cross-border cases. Must
know 7, 13, and 11 below.
In a ch 7 liquidation case, trustee is appointed. Indivs, pships, and corps (IPC) can
declare ch 7. Trustee collects the debtor's assets, liquidates them, and uses the
proceeds to pay off creditors to the extent possible.
-If the debtor is an indiv/married couple, the debtor's debts are then discharged
(relieved from person liab for most debts), w/ certain exceptions.
-If the debtor is an artificial entity (corp), it's dissolved. No discharge is given but
the effect is the same - debts are wiped out.
In a ch 13 case (adjustmt of debts of indivs w/ reg inc), the debtor repays all/a
portion of his debts over a 3 - max 5 yr pd. There's not a liquidation, but a trustee
oversees the handling of a ch 13 proceeding. At the conclusion of a ch 13
proceeding, the remaining debts of the debtor are discharged.
In a ch 11 reorg case (usually by a bus but available to IPC), no liquidation and a
trustee is usually not appointed (GR). There's hope!
-The debtor remains in possession of his assets and a plan of reorg (to pay off
debts at a diff time/amt from what was OG due) is adopted.
-creditors are paid to the extent possible and the bus continues.
,Examiners often ask if a trustee is req'd for a type of bankruptcy. Remember:
-trustee is req'd for chs 7 and 13.
-*NOT* req'd for ch 11, although the ct may appoint one if necessary.
Ch 15 (ancillary and cross-border cases) is the US adoption of the model law on
cross-border insolvency promulgated by the UN. Adopted to promote a uniform
and coordinated legal regime for cross-border insolvency cases.
Dismissal or Conversion of a Chapter 7 Case - ANS Liquidation. A ch 7 case by an
indiv consumer debtor may be dismissed or (w/ debtor's consent) converted to a
case under ch 13 upon finding that granting relief under ch 7 would constitute
abuse. Abuse may be determined by a specific means test or gen abuse test.
Step 1; determine whether inc is lower than the state median: if yes, ch 7 is ok. If
an indiv filing for ch 7 liquidation and his spouse have monthly inc > the state
median inc for a fam of the same size, the state, any int creditor, or the ct may file
a motion to dismiss, either under the means test or gen abuse.
Step 2; means test: used to determine whether creditors W/B better off under a ch
13 5-yr reorg. 60x the debtor's avg monthly inc, less allowable exps, is compared
w/ a high and low threshold (7,700 and 12,850).
-formula = [(avg monthly inc - allowed exps) x 60].
-if the amt is < 7,700, the debtor may continue under ch 7.
,-if the amt is 12,850+ (almost 13 = bad luck for you), there's a presumption of
abuse and the debtor usually will have to convert the case to ch 13 or be
dismissed.
-if the amt is < 12,850 but >= 7,700, a presumption of abuse will arise if the amt
equals at least 25% of the debtor's unsecured claims not entitled to priority pmt.
Allowable living exps incl the costs of food/clothing/shelter as set by the IRS, exps
for health ins and health savings plans, health care costs for fam members, exps
for attending elementary or high school, and exps related to keeping the debtor
safe from fam violence.
The debtor may rebut the presumption of abuse by showing special circumstances
(serious illness or call to active military duty) that create additional exps or a need
to adj current monthly inc.
Even if the debtor qualifies for ch 7, relief may be denied by showing the debtor
acted in bad faith or that under the totality of circumstances
Who May Be a Debtor - ANS Only a person who resides, or has a place of bus, in
the US is eligible to be a debtor under the bankruptcy code. Person gen incl IPC
and the like.
Limitation in ch 7 liquidations is no *RIBS*. *R*ailroads, *I*ns cos, *B*anks,
*S*avings institutions, and *S*mall bus investmt cos may not file for bankruptcy
under ch 7.
, Limitation in ch 11 record is no *BIBS*. IBS is the same, B changes. Anyone who
may be a debtor under ch 7 may also be a debtor under ch 11 (except a
stock*B*roker or commodity *B*roker). A *R*ailroad may be a debtor under ch
11. Switch R for B! Although ch 11 is intended primarily for bus debtors, an indiv is
eligible for relief under it.
GR for both ch 7 and 11 is IPC and voluntary or involuntary. Important to know
who may/may not file under various chs.
If the debtor is an indiv, credit counseling is req'd. Must occur no > 180 days
before filing the bankruptcy petition. In addition, debtors filing under chs 7 or 13
must complete a financial mgmt course before their debts are discharged.
Common Features of Chapter 7 and 11 Cases; Automatic Stay, Duties of Debtor,
and Voluntary Cases - ANS Ch 7 is liquidation, 11 is reorg. Both are IPC,
voluntary/involuntary.
Automatic stay: When a bankruptcy petition is filed in either a
voluntary/involuntary case, an automatic stay becomes effective against most
creditors. Stops all collection efforts (filing a lawsuit or demanding pmt). The auto
stay doesn't apply to criminal prosecutions, paternity suits, and cases brought to
establish/collect spousal or child support obligations.
Duties of debtor: After a petition is filed, a debtor must file:
-a list of creditors and their addresses.
-a sch of A/Ls at FMV.