A firm may file for Chapter 11 bankruptcy:
I.in an attempt to gain a competitive advantage.
II.using a prepack.
III.while allowing the current management to continue running the firm.
IV.only after the firm becomes insolvent.
A)I and III only
B)I and II only
C)I, II, and IV only
D)I, II, and III only
E)I, II, III, and IV

Question

Quizplus · Accepted Answer

Option I is correct as a firm may file for Chapter 11 bankruptcy to gain a competitive advantage. For instance, the firm may get an opportunity to restructure its operations, cut costs, and become more efficient.

Option II is also correct as a prepackaged bankruptcy lets a firm prepare a reorganization plan in advance with the creditors' approval before filing for Chapter 11 bankruptcy.

Option III is correct as current management can continue running the firm under Chapter 11 bankruptcy. The creditors' committee, however, may have some controls over the firm's operations.

Option IV is incorrect as a firm can file for Chapter 11 bankruptcy before it becomes insolvent. In such cases, the firm may file for bankruptcy to restructure its operations or to handle a significant debt burden that it cannot handle outside of bankruptcy.

A Firm May File for Chapter 11 Bankruptcy