Define each of the following terms: a. Informal restructuring; reorganization in bankruptcy

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Define each of the following terms: a. Informal restructuring; reorganization in bankruptcy

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Define each of the following terms:
a. Informal restructuring; reorganization in bankruptcy

Define each of the following terms:
b. Assignment; liquidation in bankruptcy; fairness; feasibility

Define each of the following terms:
c. Absolute priority doctrine; relative priority doctrine

Define each of the following terms:
d. Bankruptcy Reform Act of 1978; Chapter 11; Chapter 7

Define each of the following terms:
e. Priority of claims in liquidation

Define each of the following terms:
f. Extension; composition; workout; cramdown; prepackaged bankruptcy; holdout

Explanation & AnswerSolution by a verified expert

Explanation

During financial distress, the company can modify its debt in the capital structure, called informal restructuring, to re-establish itself as financially sound. This process includes extension and composition of debt. In extension, the company asks creditors to postpone the dates of repayment to a later date when the company has some positive cash flow to pay the debt. In case of. In case of composition of debt, the creditors voluntarily reduce some of their claims either by accepting lower coupon payments or a reduced principal amount.
 
Reorganization in bankruptcy is a procedure where the court orders the company to restructure its finances, capital, and management, and the company is protected from claims by the creditors. The company then pays its creditors according to a revised schedule set by the court.

Verified Answer

Restructuring is a process of modifying debt in the company's capital structure in times of financial distress. This process includes extension and composition of debt. In an extension procedure, the company asks its creditors to postpone their payment dates during financial distress. In the composition of debt as a part of the informal restructuring, the creditors voluntarily reduce their claims on the financially distressed company. Restructuring is a way of the informal settlement of claims without going through a formal bankruptcy procedure.
 
Reorganization in bankruptcy is a court-supervised bankruptcy process where the company restructures its finances, operations, and management to revive as a new business.

Explanation

In an assignment, the company decides to sell its assets to repay the creditors. The company decides to sell its assets because the assets of the firm are worth more than the business' going concern value. In this process, creditors can receive more of their claims than they would in a formal bankruptcy process. Creditors receive more claims because the assignee has more flexibility in selling the assets and very less costs are incurred.
 
Liquidation in bankruptcy is the distribution of assets to the creditors when the firm is worth more dead than alive. When the firm cannot restore its financial health, and the creditors are exposed to high risk if the operations continue; thus, the firm decides to liquidate. The distribution of assets to the creditors is governed by a specific priority of claims under Chapter 7 of the Bankruptcy Act.
 
Fairness is a primary role of the bankruptcy court in a reorganization process. It states that claims must be paid in the order of their legal and contractual priority.
 
Feasibility is a primary role of the bankruptcy court in a reorganization process. It states that there is a reasonable chance that the reorganized company is operational.

Verified Answer

The assignment is an informal liquidation process where the company decides to sell the firm's assets because the assets of the firm are worth more than they would if the business were alive.
 
Liquidation in bankruptcy is the process of distributing assets governed by a specific priority of claims under Chapter 7 of the Bankruptcy Act.
 
Fairness in a reorganization plan states that claims must be paid in the order of their legal and contractual priority.
 
Feasibility in the reorganization plan states that there is a reasonable chance that the reorganized company is operational.

Explanation

In an assignment, the company decides to sell its assets to repay the creditors. The company decides to sell its assets because the assets of the firm are worth more than the business' going concern value. In this process, creditors can receive more of their claims than they would in a formal bankruptcy process. Creditors receive more claims because the assignee has more flexibility in selling the assets and very less costs are incurred.
 
Liquidation in bankruptcy is the distribution of assets to the creditors when the firm is worth more dead than alive. When the firm cannot restore its financial health, and the creditors are exposed to high risk if the operations continue; thus, the firm decides to liquidate. The distribution of assets to the creditors is governed by a specific priority of claims under Chapter 7 of the Bankruptcy Act.
 
Fairness is a primary role of the bankruptcy court in a reorganization process. It states that claims must be paid in the order of their legal and contractual priority.
 
Feasibility is a primary role of the bankruptcy court in a reorganization process. It states that there is a reasonable chance that the reorganized company is operational.

Verified Answer

The assignment is an informal liquidation process where the company decides to sell the firm's assets because the assets of the firm are worth more than they would if the business were alive.
 
Liquidation in bankruptcy is the process of distributing assets governed by a specific priority of claims under Chapter 7 of the Bankruptcy Act.
 
Fairness in a reorganization plan states that claims must be paid in the order of their legal and contractual priority.
 
Feasibility in the reorganization plan states that there is a reasonable chance that the reorganized company is operational.

Explanation

Bankruptcy Reform Act of 1978 is an act to speed up the bankruptcy proceeding and prevents consumers from taking advantage of provisions that can eliminate certain debts. This act also governs the agreement between the creditors and debtors when the company cannot pay its debt obligations.
 
Chapter 11 is a very important section of bankruptcy law. It deals in the reorganization of the company's debt during financial distress. This helps the company by giving it some time to make its financials strong to repay its obligations.
 
Chapter 7 is a section from the bankruptcy law that comes into play when reorganization through Chapter 11 is not feasible by the management. It explains the procedures to be followed while liquidating the firm. The court assigns a trustee to liquidate the assets and distribute the proceeds. The court exercises Chapter 7, when the management is not able to liquidate competently.

Verified Answer

Bankruptcy Reform Act of 1978 is an act to speed up the bankruptcy proceedings and govern the agreement when the company cannot pay its debt obligations.
 
Chapter 11 is a section from the bankruptcy law that deals in reorganization in bankruptcy from the financial management viewpoint.
 
Chapter 7 is a section from the bankruptcy law that lists the procedures to be followed while liquidating the firm.

Explanation

The priority of claims defines the order in which the creditors are paid. It is a part of Chapter 7 of the Bankruptcy Reform Act of 1978 that ensures equitable distribution of its assets among its creditors at liquidation. Secured creditors are the priority for the payment, followed by unsecured creditors, suppliers, employees, and banks.

Verified Answer

The priority of claims is a part of Chapter 7 of the Bankruptcy Reform Act of 1978 that ensures equitable distribution of the company’s assets among its creditors at liquidation.

Explanation

In case of extension, the company asks the creditors to postpone their payment dates during financial distress. By postponing the dates of repayment, the company gets time to make its financials sound to pay the debt payments. It is preferable by creditors as it promises full payment eventually.
 
In case of composition, the creditors voluntarily reduce their claims on the financially distressed company. The claims reduced by the creditors may include the reduced principal payments, lower interest rates on debt, accepting equity in exchange for debt, or a combination of all.
 
A workout is a situation of voluntary reorganization to reestablish a company's financial health with the help of the creditors. This happens when the company is fundamentally strong, but it faces a temporary cash-flow problem.
 
In a prepackaged bankruptcy, the firm forms a reorganization plan and gets most creditors to agree with the plan before filing for bankruptcy. If most of the creditors have agreed with the reorganization plan, the reluctant creditors can be brought along with the help of a cramdown. Cramdown allows courts to mandate the reorganization plan despite dissent by some of the creditors.
 
Prepackaged bankruptcy is a type of hybrid bankruptcy that reduces the holdout problem, preserves the creditor's claims, and leads to tax savings. It combines the benefits of informal and formal bankruptcy.
 
The holdout problem is when some creditors may not agree to receive a pro-rata settlement of their claims. Some creditors may not agree because after all the other creditors are paid on a pro-rata basis, the amount left can be used to pay them the full settlement of their claims.

Verified Answer

Extension is a type of informal restructuring where the company in financial distress asks creditors to postpone their repayment dates.
 
Composition is informal restructuring where the creditors voluntarily reduce some of their claims on the financially distressed company.
 
A workout is a situation of voluntary reorganization when creditors work with the firm to recover its financial health.
 
Cramdown is a process where the court mandates the reorganization plan despite dissent by some of the creditors.
 
Prepackaged bankruptcy is a type of hybrid bankruptcy that combines the benefits of informal and formal bankruptcy.
 
The holdout problem is a problem where some creditors may not agree to receive pro-rata settlement of their claims in the hope of receiving the full amount of their claims from the amo

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