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

A mid-sized manufacturer is unable to meet an upcoming interest payment but its core operations remain profitable. Management proposes to negotiate directly with its lenders to amend terms without filing for court protection. Which of the following is the most commonly cited advantage of such an out-of-court workout compared with a formal court-supervised bankruptcy process?

The main advantage of an out-of-court workout is lower direct costs and faster resolution, which preserves going-concern value. Binding dissenting creditors, the automatic stay and contract rejection are powers of formal bankruptcy, not of voluntary negotiations among consenting parties.

  1. AIt binds all dissenting creditors to the agreed plan by majority vote
  2. BIt generally has lower direct costs and preserves more going-concern valueCorrect
  3. CIt automatically stays all creditor collection actions
  4. DIt permits the firm to reject burdensome contracts without counterparty consent

Explanation

Out-of-court workouts avoid legal and administrative fees, are faster, and limit the stigma and business disruption of formal bankruptcy, thereby preserving value. Binding dissenters, an automatic stay and contract rejection are features of formal court processes, not voluntary workouts.

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