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

A manufacturing company has defaulted on its loans and its creditors conclude that the business has no realistic prospect of continuing as a going concern. Under the US Bankruptcy Code, which filing is designed to wind the business down through a trustee who sells the assets and distributes the proceeds to creditors?

Chapter 7 is the liquidation chapter of the US Bankruptcy Code. A trustee takes control, sells the assets and distributes the proceeds to creditors by priority. Chapter 11 instead aims to reorganize the firm as a going concern, so it does not fit a hopeless business.

  1. AChapter 7 liquidationCorrect
  2. BChapter 11 reorganization
  3. CA prepackaged Chapter 11 plan
  4. DAn out-of-court exchange offer

Explanation

Chapter 7 provides for liquidation: a trustee is appointed, assets are sold, and proceeds are distributed according to priority. Chapter 11 is aimed at reorganization, with the debtor usually remaining in possession and proposing a plan. A prepackaged plan is a form of Chapter 11, and an exchange offer is out of court.

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