FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies
A firm files for Chapter 11. A secured lender with a mortgage on a plant attempts to seize and sell the plant the following week to recover its loan. Which feature of the bankruptcy filing primarily prevents this action?
The automatic stay prevents the seizure. Upon filing, it immediately suspends most creditor collection and enforcement actions, including foreclosure on collateral, giving the firm breathing space to reorganize. The absolute priority rule, cramdown and DIP financing address payment order, plan confirmation and new funding, not stopping enforcement.
- AThe absolute priority rule
- BThe automatic stayCorrect
- CThe cramdown provision
- DThe debtor-in-possession financing priority
Explanation
On filing, the automatic stay immediately halts most collection and enforcement actions by creditors, including seizure of collateral. The absolute priority rule governs the order of payment in a plan, cramdown concerns confirming a plan over dissenting classes, and DIP financing provides new funding. None of those stops a creditor from seizing assets.
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