What are some situations other than immediate financial distress that lead firms to file for bankruptcy?

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What are some situations other than immediate financial distress that lead firms to file for bankruptcy?

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What are some situations other than immediate financial distress that lead firms to file for bankruptcy?

Explanation & AnswerSolution by a verified expert

Explanation

Generally, bankruptcy is filed when the company is so financially weak that it cannot pay its obligations. But instead of immediate financial distress, if the company's financial forecasts suggest that the company will be unable to pay its obligations, given that the current situations continue to exist, the company may file for bankruptcy. This helps the creditors receive more payments for their claims than they would if the company were in the financial distress.

Verified Answer

Firms may file for bankruptcy if the company's financial forecasts suggest that if the current conditions persist, the company will not be able to pay its future payments or it will become insolvent.

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