Question 1

If a firm enters into a workout in which a voluntary negotiated agreement with debtors is achieved, the firm may lose its right to claim NOLs in its tax filing.

Accepted Answer

According to the Internal Revenue Code, if a company enters into a negotiated voluntary workout agreement with its creditors to restructure its debt, it may trigger a change in ownership that could result in the loss of its net operating losses (NOLs) that can be carried over for tax purposes. Therefore, it is important to assess the potential tax implications before entering into a workout agreement.

Question 2

In the absence of a voluntary settlement out of court, the debtor firm may seek protection from its creditors by initiating bankruptcy. However, creditors cannot force the debtor firm into bankruptcy.

Accepted Answer

Creditors can initiate bankruptcy proceedings against the debtor firm if they meet certain criteria, such as having a minimum amount of debt owed to them. This is known as involuntary bankruptcy.

Question 3

Chapter 11 of the U.S. bankruptcy code deals with liquidation while Chapter 7 addresses reorganization.

Accepted Answer

Chapter 11 actually deals with reorganization, while Chapter 7 pertains to liquidation.

Question 4

Under a prepackaged bankruptcy, the debtor negotiates with creditors well in advance of filing for a Chapter 7 bankruptcy.

Accepted Answer

In a prepackaged bankruptcy, negotiations occur before filing for Chapter 11 bankruptcy, not Chapter 7, to expedite the reorganization process.

Question 5

As part of a Chapter 15 proceeding, the U.S. bankruptcy court may authorize a trustee to act in a foreign country on behalf of the U.S. Bankruptcy Court.

Accepted Answer

This is true. Under Chapter 15 of the U.S. Bankruptcy Code, the U.S. bankruptcy court may authorize a trustee or other representative to act in a foreign country on behalf of the U.S. court in order to administer the assets of the debtor or protect the interests of the creditors. This is known as a "recognition proceeding."

Question 6

The filing of a petition triggers an automatic stay once the court accepts the request, which provides a period suspending all judgments, collection activities, foreclosures, and repossessions of property by the creditors on any debt or claim that arose before the filing of the bankruptcy petition.

Accepted Answer

This is correct as per the provisions of the U.S. bankruptcy code, section 362. The automatic stay goes into effect immediately upon the filing of the petition and provides a breathing space for the debtor to reorganize or liquidate their debts.

Question 7

The court must approve any plan accepted by the debtor's shareholders and creditors. True of False

Accepted Answer

The answer of The court must approve any plan accepted...

Question 8

Empirical studies show that company size (measured by assets), case duration (measured in days), and the number of parties involved in the proceedings (measured in terms of the numbers of professional firms working) explain most of the case-to-case variation in professional fees.

Accepted Answer

Empirical studies have shown that company size, case duration, and the number of parties involved are significant factors in explaining the variation in professional fees in legal proceedings.

Question 9

The court can ignore the objections of creditors and stockholders if it feels the reorganization is both fair and feasible.

Accepted Answer

This statement is true according to the bankruptcy laws in the United States. The court has the power to approve a reorganization plan even if some creditors or stockholders object, as long as it is deemed fair and feasible for the debtor to carry out.

Question 10

Federal law prohibits trading in a bankrupt firm's securities.

Accepted Answer

Federal law does not prohibit trading in a bankrupt firm's securities, but it may lead to increased risk due to the uncertainty of the company's future.

Question 11

Prior to the Bankruptcy Abuse Protection and Consumer Protection Act of 2005, the debtor had the exclusive right to file a plan of reorganization for the first 120 days after it filed the case.

Accepted Answer

Prior to the 2005 act, the debtor did have the exclusive right to file a plan of reorganization for the first 120 days.

Question 12

In the absence of a voluntary settlement out of court, the debtor firm may seek protection from its creditors by initiating bankruptcy or may be forced into bankruptcy by its creditors.

Accepted Answer

This statement is true. If a debtor firm is unable to reach a voluntary settlement with its creditors, it may choose to file for bankruptcy or may be forced into bankruptcy by its creditors through legal action.

Question 13

U.S. bankruptcy laws and practices focus on maintaining shareholder value during the bankruptcy process.

Accepted Answer

U.S. bankruptcy laws and practices prioritize the repayment of creditors and the restructuring of financially distressed companies, rather than maintaining shareholder value.

Question 14

Automatic stays are granted by the court only when the debtor files for bankruptcy.

Accepted Answer

Automatic stays are a provision under U.S. bankruptcy law that halts actions by creditors to collect debts from a debtor who has declared bankruptcy, and they come into effect immediately upon filing for bankruptcy, without the need for a court order.

Question 15

In liquidation, bankruptcy professionals, including attorneys, accountants, and trustees, often end up with the majority of the proceeds generated by selling the assets of the failing firm.

Accepted Answer

Bankruptcy professionals are typically paid from the proceeds of asset sales, and their fees can be substantial, often consuming a significant portion of the available funds before creditors receive payment.

Question 16

Chapter 11 reorganization often enables creditors to recover relatively more of their claims than under liquidation.

Accepted Answer

Chapter 11 reorganization allows the business to continue operating while a plan is formulated to repay creditors over time, often resulting in higher recoveries for creditors than if the business was liquidated.

Question 17

The purpose of Chapter 15 of the U.S. Bankruptcy Code is to prioritize the payment of creditors.

Accepted Answer

Chapter 15 of the U.S. Bankruptcy Code is designed to provide a mechanism for dealing with cross-border insolvency cases, facilitating cooperation between U.S. courts and parties of interest with those of other countries involved in the insolvency.

Question 18

Companies may not seek the protection of bankruptcy court to avoid liquidation.

Accepted Answer

Companies can seek the protection of bankruptcy court to reorganize their debts and avoid liquidation through processes like Chapter 11 bankruptcy in the United States.

Question 19

Prepackaged bankruptcies are less common today than in years past.

Accepted Answer

Prepackaged bankruptcies have become more common as they offer a quicker, more efficient, and less costly way to restructure a company's debt, making them an attractive option for struggling companies and their creditors.

Question 20

Prior to the Bankruptcy Abuse Protection and Consumer Protection Act of 2005 (BAPCPA), commercial enterprises used Chapter 11 Reorganization to continue operating a business and to repay creditors through a court-approved plan of reorganization.

Accepted Answer

Prior to the BAPCPA, commercial enterprises commonly used Chapter 11 Reorganization for this purpose.

Quiz 17: Alternative Exit and Restructuring Strategies: