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FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies

A distressed company is considering a prepackaged Chapter 11 rather than a conventional (free-fall) Chapter 11. What is the principal advantage of the prepackaged approach?

The main advantage of a prepackaged Chapter 11 is speed and lower cost. The firm negotiates the plan and collects creditor votes before filing, so it spends far less time in court and suffers less business disruption. Court confirmation is still required, and equity holders are not guaranteed anything.

  1. ACreditor votes are solicited before filing, so the time in court and the associated costs are typically much shorterCorrect
  2. BIt avoids the need for any court confirmation of the plan
  3. CIt removes the automatic stay so that creditors can be paid immediately
  4. DIt guarantees that equity holders retain their full ownership

Explanation

In a prepackaged case the debtor negotiates the plan and obtains creditor acceptances before filing, so confirmation can be quick and cheaper, limiting disruption to the business. Court confirmation is still required, the stay still applies, and equity is not guaranteed to be retained.

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