1. Chapter 7 of the Bankruptcy Act is designed to do which of the following?
a. Protect shareholders against creditors.
b. Establish the rules of reorganization for firms with projected cash flows that eventually will be
sufficient to meet debt payments.
c. Ensure that the firm is viable after emerging from bankruptcy.
d. Allow the firm to negotiate with each creditor individually.
e. Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and
allow insolvent debtors to discharge all of their obligations and to start over unhampered by a
burden of prior debt.
2. Which of the following statements is most CORRECT?
a. Our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and have remained
unaltered since that time.
b. Federal bankruptcy law deals only with corporate bankruptcies. Municipal and personal
bankruptcy are governed solely by state laws.
c. All bankruptcy petitions are filed by creditors seeking to protect their claims against firms in
financial distress. Thus, all bankruptcy petitions are involuntary as viewed from the perspective
of the firm's management.
d. Chapters 11 and 7 are the most important bankruptcy chapters for financial management
purposes. If a reorganization plan cannot be worked out under Chapter 11, then the company
will be liquidated as prescribed in Chapter 7 of the Act.
e. "Restructuring" a firm's debt can involve forgiving a certain portion of the debt, but it cannot call
for changing the debt's maturity or its contractual interest rate.
3. Which of the following statements is most CORRECT?
a. The primary test of feasibility in a reorganization is whether every claimant agrees with the
reorganization plan.
b. The basic doctrine of fairness states that all debtholders must be treated equally.
c. Since the primary issue in bankruptcy is to determine the sharing of losses between owners
and creditors, the "public interest" is not a relevant concern.
d. While a firm is in bankruptcy, the existing management is always allowed to retain control,
though the court will monitor its actions closely.
e. To a large extent, the decision to dissolve a firm through liquidation versus keeping it alive
through reorganization depends on a determination of the value of the firm if it is rehabilitated
versus the value of its assets if they are sold off individually
1. To answer this question, we need to understand the purpose of Chapter 7 of the Bankruptcy Act. To do so, we can refer to the Bankruptcy Act, which is a federal law that governs bankruptcy cases in the United States. Chapter 7 of the Bankruptcy Act specifically deals with liquidation bankruptcy, where a debtor's nonexempt assets are sold to pay off creditors.
Looking at the answer choices:
a. Protect shareholders against creditors: This is not the purpose of Chapter 7 bankruptcy. It focuses on the distribution of assets to creditors, not protecting shareholders.
b. Establish the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments: This is not the purpose of Chapter 7 bankruptcy. It deals with liquidation, not reorganization.
c. Ensure that the firm is viable after emerging from bankruptcy: This is not the purpose of Chapter 7 bankruptcy. It does not aim to preserve the viability of the firm after bankruptcy.
d. Allow the firm to negotiate with each creditor individually: This is not the purpose of Chapter 7 bankruptcy. It involves the liquidation of assets to distribute proceeds to creditors, rather than negotiating with individual creditors.
e. Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt: This is the correct purpose of Chapter 7 bankruptcy. It allows the discharge of debt for insolvent debtors and provides safeguards against asset withdrawal by owners.
Therefore, the correct answer is e. Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt.
2. To find the correct statement, we need to evaluate each answer choice.
a. Our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and have remained unaltered since that time: This statement is incorrect. Bankruptcy laws have been revised and updated since the 1930s.
b. Federal bankruptcy law deals only with corporate bankruptcies. Municipal and personal bankruptcy are governed solely by state laws: This statement is incorrect. Federal bankruptcy law applies to both corporate and personal bankruptcies, including municipal bankruptcies.
c. All bankruptcy petitions are filed by creditors seeking to protect their claims against firms in financial distress. Thus, all bankruptcy petitions are involuntary as viewed from the perspective of the firm's management: This statement is incorrect. Bankruptcy petitions can be filed voluntarily by the debtor or involuntarily by creditors.
d. Chapters 11 and 7 are the most important bankruptcy chapters for financial management purposes. If a reorganization plan cannot be worked out under Chapter 11, then the company will be liquidated as prescribed in Chapter 7 of the Act: This statement is correct. Chapters 11 and 7 are indeed the most important bankruptcy chapters, with Chapter 11 focusing on reorganization and Chapter 7 dealing with liquidation.
e. "Restructuring" a firm's debt can involve forgiving a certain portion of the debt, but it cannot call for changing the debt's maturity or its contractual interest rate: This statement is incorrect. Restructuring a firm's debt can involve various changes, including changing the debt's maturity and its contractual interest rate.
Therefore, the correct answer is d. Chapters 11 and 7 are the most important bankruptcy chapters for financial management purposes. If a reorganization plan cannot be worked out under Chapter 11, then the company will be liquidated as prescribed in Chapter 7 of the Act.
3. To determine the correct statement, let's evaluate each option.
a. The primary test of feasibility in a reorganization is whether every claimant agrees with the reorganization plan: This statement is incorrect. While it is important to have support from claimants, the primary test of feasibility in a reorganization is whether the reorganization plan is realistic and can successfully rehabilitate the firm.
b. The basic doctrine of fairness states that all debtholders must be treated equally: This statement is incorrect. The basic doctrine of fairness does not require equal treatment of debtholders. Different classes of creditors may have different rights and priorities in a bankruptcy proceeding.
c. Since the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the "public interest" is not a relevant concern: This statement is incorrect. The public interest can be a relevant concern in bankruptcy cases, especially when it comes to preserving jobs, maintaining economic stability, and protecting public resources.
d. While a firm is in bankruptcy, the existing management is always allowed to retain control, though the court will monitor its actions closely: This statement is incorrect. In some bankruptcy cases, especially Chapter 11 reorganizations, existing management may retain control, but this is not always the case. The court has the authority to remove and appoint new management if necessary.
e. To a large extent, the decision to dissolve a firm through liquidation versus keeping it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually: This statement is correct. The decision to liquidate or reorganize a firm depends on evaluating the potential value of rehabilitation versus the value of individual asset sales.
Therefore, the correct answer is e. To a large extent, the decision to dissolve a firm through liquidation versus keeping it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually.