CPA Exam — REG (Regulation)Business LawEasy
A debtor, 'Financially Sound Corp.', is experiencing temporary cash flow issues but has significant assets and a viable business model. They are seeking protection from creditors while they reorganize their finances and develop a plan to repay debts over time. Which type of bankruptcy filing is most appropriate for 'Financially Sound Corp.'?
- AChapter 11 bankruptcy
- BChapter 13 bankruptcy
- CChapter 7 bankruptcy
- DChapter 9 bankruptcy
Show answer & explanationAnswer & explanation
Correct answer: A. Chapter 11 bankruptcy
Chapter 11 bankruptcy is designed for businesses (and sometimes individuals with substantial debt) that wish to reorganize their finances and continue operating while repaying creditors over time. It allows the debtor to propose a plan of reorganization.
Why the other options are wrong
- B. Chapter 13 is for individuals with regular income to reorganize debt, not typically for corporations.
- C. Chapter 7 is for liquidation, where assets are sold to pay creditors, and the business typically ceases to exist.
- D. Chapter 9 is specifically for municipalities (cities, towns, counties) and not for private corporations.
Chapter 11 Bankruptcy
A type of bankruptcy that allows businesses (and sometimes individuals) to reorganize their financial affairs while continuing to operate, ultimately proposing a plan to repay creditors over time.
- Used for business reorganization.
- Debtor typically remains in possession of assets.
- Requires a plan of reorganization to be approved by creditors and the court.
Memory trick: Think of the 'chapter' that fits the 'character' of the debtor.