Association for Financial Professionals (AFP) Practice Exam

What is the best bankruptcy filing procedure if management favors reorganization?

1. Chapter 7 (pre-packaged)

2. Chapter 11 (unanimous consent procedure)

3. Chapter 11 (cram-down procedure)

4. Chapter 7 (pre-arranged)

The correct answer is: Chapter 11 (unanimous consent procedure)

The best bankruptcy filing procedure for management that favors reorganization is the Chapter 11 option utilizing the unanimous consent procedure. Chapter 11 is specifically designed for businesses seeking to restructure their debts while continuing operations; it provides a legal framework for an organization to develop a reorganization plan that addresses creditors' claims and allows for the continuation of the business. The unanimous consent procedure allows management to negotiate terms directly with creditors, potentially leading to quicker approval of a reorganization plan, provided all relevant parties agree to the terms. This consensual approach avoids the time-consuming and sometimes contentious processes associated with contested plans and promotes a smoother path to restructuring. In contrast, other options, such as Chapter 7 filings (whether pre-packaged or pre-arranged), typically lead to liquidation rather than reorganization. These options do not align with the goal of management seeking to revive the business and manage its debts effectively. The cram-down procedure within Chapter 11 can be useful in certain scenarios but requires court intervention to approve a plan without full creditor consensus, which may not align perfectly with management's desire for a collaborative and less adversarial process.