FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies
A distressed firm files under Chapter 11. A hedge fund analyst asks what happens to the firm's management and creditors' collection efforts immediately after the filing. Which statement is correct?
In Chapter 11, management typically stays in control as debtor-in-possession, and an automatic stay stops most creditor collection and enforcement actions. This gives the firm breathing space to negotiate a reorganization plan. A trustee-led liquidation describes Chapter 7 instead.
- AManagement is usually replaced by a trustee, and creditors may continue to seize collateral.
- BManagement typically remains in control as debtor-in-possession, and an automatic stay halts most creditor collection actions.Correct
- CEquity holders are paid first from asset sales, and the firm must cease operations.
- DThe court immediately converts all debt to equity at par.
Explanation
On a Chapter 11 filing, the automatic stay suspends most collection efforts and enforcement against the debtor. Management normally continues as debtor-in-possession. A trustee, forced liquidation, or equity-first payment does not describe Chapter 11.
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