Question

Regarding the informal bankruptcy procedures, which of the following is NOT correct?

A. Reorganization plans usually require some type of restructuring of the firm's debts; this may involve an extension, which postpones the date of required payment of past-due obligations.

B. Reorganization may involve a composition, by which the creditors voluntarily reduce their claims on the debtor or the interest rate on their claims.

C. Informal bankruptcy procedures are usually less costly than the formal bankruptcy procedures. This could be listed a s a reason why financially distressed firms may prefer informal bankruptcy procedures, whenever appropriate.

D. Assignment is an informal procedure for liquidating a firm, and it usually yields creditors a larger amount than they would receive in a formal bankruptcy liquidation. However, assignments are feasible only if the firm is small and its affairs are not too complex.

E. All of the above are correct.

Answer 1

E. All of the above are correct.

Informal bankruptcy is less costly than formal bankruptcy. Under such bankruptcy the firm may receive an extension on its loan repayments. Creditors choose to voluntarily reduce their claims or interest rate on their claims. Liquidating a firm is easier if its operations are small and non-complex.