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Unformatted text preview: were liquidated? Should the firm file for bankruptcy, or should it try to use informal procedures? Who would control the firm during liquidation or reorganization? 12 Settlement­Informal and Formal When a firm experiences financial distress, its managers and creditors must decide whether the problem is temporary and the firm is really financially viable or whether a permanent problem exists that endangers the firm’s life. Then the parties must decide whether to try to solve the problem informally or under direction of a bankruptcy court. Because of costs associated with formal bankruptcy­ including the disruptions that occur when a firm’s customers, suppliers and employees learn that it has filed under the bankruptcy act­ it is desirable if possible, to reorganize (or liquidate) outside of formal bankruptcy. 13 What informal remedies are available to firms in financial distress? Informal reorganization Informal liquidation Why might informal remedies be preferable to formal bankruptcy? What types of companies are most suitable for informal remedies? 14 Informal Reorganization Workout: Voluntary informal reorganization plan. Restructuring: Current debt terms are revised to facilitate the firm’s ability to pay. Extension: Creditors postpone the dates of required interest or principal payments, or both. Creditors prefer extension because they are promised eventual payment in full. 15 (More... Composition: Creditors voluntarily reduce their fixed claims on the debtor by either accepting a lower principal amount or accepting equity in lieu of debt repayment. Assignment: An informal procedure for liquidating a firm’s assets. Title to the debtor’s assets is transferred to a third party, called a trustee or assignee, and then the assets are sold off. 16 Describe the following terms related to U.S. bankruptcy law: Chapter 11: Business reorganization guidelines. Chapter 7: Liquidation procedures. Trustee: Appointed to control the company when current management is incompete...
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This note was uploaded on 02/11/2014 for the course MANA 2028 taught by Professor Sisterennis during the Winter '12 term at Marquette.

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