FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies
A mid-sized manufacturer with a single bank lender and a few bondholders is facing a liquidity shortfall but remains operationally viable. Management proposes to renegotiate terms directly with creditors rather than file for court protection. Which of the following is the most commonly cited advantage of such an out-of-court workout compared with a formal bankruptcy filing?
The main advantage of an out-of-court workout is lower direct costs and less operational disruption, since it avoids court processes and stigma. Binding dissenting creditors, an automatic stay and contract rejection are powers available only in formal bankruptcy proceedings.
- ALower direct legal and administrative costs and less disruption to operationsCorrect
- BBinding effect on all creditors, including those who do not agree
- CAutomatic stay on all creditor collection actions
- DAbility to reject burdensome contracts and leases unilaterally
Explanation
Out-of-court workouts are typically faster and cheaper, and they preserve customer and supplier relationships by avoiding the stigma of a filing. The other three options (binding all creditors, automatic stay, contract rejection) are features of formal bankruptcy, not private negotiations.
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