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

A distressed manufacturer's management believes the business is viable if its debts are restructured, and it wants to keep operating under its own control while negotiating with creditors under court protection. Which US Bankruptcy Code filing best fits this objective?

Chapter 11 reorganization fits best. It lets the debtor stay in control as debtor-in-possession, keep operating under court protection through the automatic stay, and negotiate a plan with creditors. Chapter 7 instead appoints a trustee to liquidate the assets and wind the firm up.

  1. AChapter 7 liquidation
  2. BChapter 11 reorganizationCorrect
  3. CAn out-of-court foreclosure by the secured lender
  4. DA Chapter 7 filing followed by an immediate asset sale

Explanation

Chapter 11 allows a debtor to continue operating as debtor-in-possession while it proposes a plan of reorganization under court protection. Chapter 7 appoints a trustee to liquidate the assets and ends the business, so it does not fit a going-concern restructuring goal.

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