Question

Give two reasons why companies that are in default and their creditors try to restructure debt outside of bankruptcy before resorting to filing a bankruptcy petition.

Answer 1

When the company are in default and their creditors try to restructure debt outside of bankruptcy before resorting to filing a bankruptcy petition because of following reasons-

A.they believe that in the bankruptcy proceedings, they are not going to get fully paid of their debt, so they want to settle it outside the bankruptcy petition as they will be getting higher proportion of their debt back through the company.

B. In bankruptcy proceedings, the claim on asset is properly defined so the claim on asset should be for secured creditor first, so all those unsecured creditors will be having residual kind of claim after the secured creditors have been paid, so unsecured creditors want to settle the debt outside the bankruptcy, before resorting to filing a bankruptcy petition.