Bankruptcy and Debt Restructuring Concepts

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Questions and Answers

What is informal debt restructuring?

An agreement between a troubled firm and its creditors to change existing debt terms.

What is reorganization in bankruptcy?

A court-approved attempt to keep a company alive by changing its capital structure in lieu of liquidation.

What is the purpose of assignment in bankruptcy?

An informal procedure for liquidating debts transferring title to a debtor's assets to a third person.

What does liquidation in bankruptcy involve?

The sale of the assets of a firm and the distribution of the proceeds to the creditors and owners. Signup and view all the answers

What does the standard of fairness in bankruptcy state?

Claims must be recognized in the order of their legal and contractual priority. Signup and view all the answers

What does feasibility refer to in the context of bankruptcy?

There must be a reasonably high profitability of successful rehabilitation and profitable future operations. Signup and view all the answers

What is the absolute priority doctrine?

States that claims must be paid in strict accordance with the priority of each claim. Signup and view all the answers

How does the relative priority doctrine differ from the absolute priority doctrine?

Relative priority is more flexible and gives balanced consideration to all claimants. Signup and view all the answers

What was the Bankruptcy Reform Act of 1978 designed to do?

It was enacted to speed up and streamline bankruptcy proceedings. Signup and view all the answers

What does Chapter 11 of the Bankruptcy Reform Act provide for?

The reorganization of a business rather than its liquidation. Signup and view all the answers

What happens under Chapter 7 of the Bankruptcy Reform Act?

It provides for the liquidation of a firm to repay creditors. Signup and view all the answers

What is the priority of claims in liquidation established in?

Chapter 7 of the Bankruptcy Act. Signup and view all the answers

What is an extension in debt restructuring?

A form of debt restructuring where creditors postpone the dates of required payments. Signup and view all the answers

What does composition involve in debt restructuring?

Creditors voluntarily reduce their fixed claims by accepting a lower principal amount. Signup and view all the answers

What is a workout in bankruptcy terms?

Voluntary reorganization plans arranged between creditors and generally sound companies. Signup and view all the answers

What is a cramdown in bankruptcy?

Reorganization plans mandated by the bankruptcy court that are binding on all parties. Signup and view all the answers

What is a prepackaged bankruptcy?

A type of reorganization that combines advantages of informal workouts and formal Chapter 11. Signup and view all the answers

What is a holdout in informal reorganizations?

A characteristic where all parties don't agree to the voluntary plan. Signup and view all the answers

Study Notes

Informal Debt Restructuring

An agreement between a debtor and creditors that alters existing debt terms.
Extensions postpone payment dates, while compositions reduce creditor claims.

Reorganization in Bankruptcy

A court-approved process aimed at sustaining a company by restructuring its capital instead of liquidating it.
Must meet standards of fairness and feasibility.

Assignment

An informal debt liquidation method.
Transfers a debtor's asset title to a third party known as an assignee or trustee.

Liquidation in Bankruptcy

Involves selling a firm's assets and distributing the proceeds to creditors and owners in a specified priority order.

Fairness

Claims are recognized based on legal and contractual priority.
Reorganization must be equitable for all parties involved.

Feasibility

Requires a reasonable expectation of successful rehabilitation and profitable future operations.

Absolute Priority Doctrine

Claims must be settled strictly according to their priority level, without consideration for other claimants' circumstances.

Relative Priority Doctrine

More flexible than absolute priority.
Takes a balanced approach to the interests of all claimants during bankruptcy reorganization.

Bankruptcy Reform Act of 1978

Enacted to expedite and simplify bankruptcy processes.
Represented a shift towards a relative priority doctrine for creditor claims.

Chapter 11

The section of the Bankruptcy Reform Act devoted to business reorganization.
Focuses on restructuring rather than liquidating a business.

Chapter 7

Part of the Bankruptcy Reform Act dealing with firm liquidation to repay creditors.

Priority of Claims in Liquidation

Established in Chapter 7 of the Bankruptcy Act.
Defines the sequence in which a debtor's assets are allocated to creditors.

Extension

A form of debt restructuring that delays required payments of interest or principal by creditors.

Composition

Creditors willingly lessen their claims on the debtor by accepting reduced principal amounts, lower interest rates, equity in place of debt, or a combination thereof.

Workout

Voluntary reorganization plans between creditors and financially sound companies facing temporary difficulties.
Usually requires some debt restructuring.

Cramdown

Reorganization plans mandated by bankruptcy courts that are binding for all parties involved.

Prepackaged Bankruptcy

A reorganization strategy combining benefits of informal workouts and formal Chapter 11 processes.

Holdout

A challenge in informal restructuring where not all parties consent to a voluntary plan.
Typically involves creditors seeking full payment on their claims.

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Description

Test your knowledge on key concepts of bankruptcy and debt restructuring. This quiz covers informal agreements, court-approved processes, and the importance of fairness and feasibility in reorganization. Dive into the essentials of liquidation and the Absolute Priority Doctrine.