Chapter 24 Bankruptcy, Reorganization, and Liquidation a. Informal debt restructuring is the agreement between the creditors and troubled firm to change the existing debt terms. An extension postpones the required payment date, while a composition is a reduction in creditor claims. | Chapter 24 Bankruptcy Reorganization and Liquidation ANSWERS TO END-OF-CHAPTER QUESTIONS 24-1 a. Informal debt restructuring is the agreement between the creditors and troubled firm to change the existing debt terms. An extension postpones the required payment date while a composition is a reduction in creditor claims. Extension provides payment in full though delayed. Conversely composition involves a reduced cash settlement. Restructuring often involves both extension and composition. A reorganization in bankruptcy is a court-approved attempt to keep a company alive by changing its capital structure. A reorganization must adhere to the standards of fairness and feasibility. b. Assignment is an informal procedure for liquidating debts which transfers title to a debtor s assets to a third person known as an assignee or trustee. Assignment normally yields creditors a larger amount than they would receive in a formal bankruptcy. However an assignment does not automatically result in a full and legal discharge of all the debtor s liabilities nor does it protect the creditors against fraud. Liquidation is the sale of the assets of a firm and the distribution of the proceeds to the creditors and owners in a specific priority. The decision whether to reorganize or liquidate should be based on the value of the firm if it is rehabilitated versus the value of the assets if they are sold off individually. The procedure that promises higher returns to the creditors and owners would be adopted. The standard of fairness states that claims must be recognized in the order of their legal and contractual priority. In simpler terms the reorganization must be fair to all parties. The standard of feasibility states that there must be a reasonably high probability of successful rehabilitation and profitable future operations. c. The absolute priority doctrine states that claims must be paid in strict accordance with the priority of each claim regardless of the consequence to other .
