Deck 25: Alternatives for Insolvent Borrowers

Question 1

When a business no longer has enough money to pay its bills and maintain operations, it is considered to be insolvent.

Answer 1

True

Question 2

A workout is only an option for a business if a bankruptcy is not possible.

Answer 2

False

Question 3

Often times, a condition of a workout process is that the creditor may require the debtor to hire a turnaround professional who will help with the workout process.

Answer 3

True

Question 4

Turnaround advisor, Sam Smith, recommends hiring an interim team to replace existing top management while they search for new top management. This is called a retrenchment workout model.

Question 5

Once a fair workout model is achieved, all creditors must agree to it as binding.

Question 6

An ABC allows the parties to liquidate assets as an alternative to bankruptcy by allowing a debtor to voluntarily assign property in trust for her creditors.

Question 7

In an ABC the first step in this process is to obtain a judgment for the court.

Question 8

The out of existence plan is also called the "lights-out option."

Question 9

An attempt by a debtor to solve a financial problem through a consensual agreement with creditors outside of a court proceeding is a(n)

A) Insolvency hearing
B) Workout
C) Equity infusion
D) Mediation

Question 10

Sandy incurred a massive debt in medical expenses owed to a local hospital. She simply did not have the assets or income to pay the bill. Therefore, she contacted the hospital and requested a reduction in the bill, a payment plan and the opportunity to work off part of the bill by working at the hospital cafeteria. The hospital agreed. This is an example of a(n)

A) Workout
B) Mediation
C) Credit hearing
D) Judicial levy

Question 11

All of the following statements about a workout are correct except

A) Generally, a workout is preferred to a bankruptcy.
B) The debtor and all the creditors must consent to the plan.
C) The solutions in a workout are heavily regulated by state statutes.
D) It is an agreement outside of the court.

Question 12

In a workout, creditors are usually paid in all of the following ways except,

A) Future cash flow
B) Equity infusion
C) New financing
D) Bankruptcy

Question 13

An equity infusion requires

A) Money through an outside private investor.
B) The debtor must sell personal assets.
C) The creditor must reduce the amount of debt.
D) The court must approve the arrangement.

Question 14

An individual or group of individual professionals who assist management in the workout process is called

A) Credit counselor
B) Bankruptcy advisor
C) Turnaround advisor
D) Workout judge

Question 15

Shelby "the fixer" Hiland is a famous consultant to the management of struggling businesses trying to fix their financial problems and repay their debt. They say she is ruthless but effective as she has a 100% success rate for her clients. Shelby is a(n)

A) Enforcer
B) Turnaround advisor
C) Turnabout consultant
D) Financial professional

Question 16

A turnaround advisor may do all the following tasks except

A) Prepare the financial projections of the business.
B) Communicate with the creditors.
C) Negotiate a workout plan.
D) Appear in court on behalf of the debtor.

Question 17

The acronym, SWOT, for the five step plan of a turnaround advisor means

A) Strengths, weaknesses, opportunities and threats
B) Safety, weaknesses, organization and techniques
C) Structure, worksite, organization and turnover
D) Schedule, withhold, operate and treat

Question 18

Each of the following is part of the process to define the problem for a turnaround advisor except

A) Evaluate and assess the organization.
B) File for bankruptcy.
C) Resolve acute needs.
D) Revitalize the organization.

Question 19

The most common workout model for businesses that are insolvent is

A) Repositioning
B) Reorganization
C) Retrenchment
D) Replacement

Question 20

A workout model for insolvent businesses that involve a lot of short-short term actions intended to stabilize the company as quickly as possible is

A) Replacement
B) Repositioning
C) Renewal
D) Retrenchment

Question 21

Renaldo is a turnaround advisor to Futbol Fanatics Incorporated, an insolvent business. To assist them in their workout plan, Renaldo advises to reduce the size of the business and to focus on only one aspect of the business rather than a wide variety of areas. He suggests selling several storage buildings and firing several of the employees. His workout model would be called

A) Retrenchment
B) Repositioning
C) Renewal
D) Replacement

Question 22

When a turnaround advisor employs the retrenchment model, he may use all the following methods except

A) Sell assets
B) Fire employees
C) Outsource
D) Infuse extra money

Question 23

A workout method that generates revenue with new innovations and modifying the company's image or mission is

A) Retrenchment
B) Repositioning
C) Renewal
D) Replacement

Question 24

Marty Hog Hunting Supplies has become insolvent due to low sales and nonexistent profits. They hire a turnaround advisor, Rachel Evans, who suggests that they modify their advertising model which currently includes rainbows, hearts and unicorns and a mission statement that states, "Hunting Hogs is Magical." Rachel suggests they should change to a camo theme and a mission, "Hog Hunting for the Mighty." She also suggests that company image should switch away from the current cartoon image to the outdoors theme. Rachel's workout model is

A) Retrenchment
B) Renewal
C) Repositioning
D) Replacement

Question 25

Dewy, Cheatum and Howe Law Firm has a billboard that states, "Hire us so we can make as much money as possible for us!" is insolvent. The hire a turnaround advisor who suggests they change the name of their firm and change the billboard advertisement to read, "We are here to serve your needs as you are our first priority!" Of which workout model is this an example?

A) Retrenchment
B) Renewal
C) Replacement
D) Repositioning

Question 26

The workout method that replaces the top-level management with an interim team while a search for new top-level managers in conducted is called

A) Retrenchment
B) Renewal
C) Replacement
D) Repositioning

Question 27

Westerfield Industries is insolvent. A turnaround advisor removes all of the executive officers and replaces them with her team of consultants to run the business until new executive officers can be hired. This is an example of which workout model?

A) Replacement
B) Renewal
C) Repositioning
D) Retrenchment

Question 28

Dunlin Muffin is a paper company that has gone insolvent due to the decrease in print material in lieu of digital material. However, top management refuses to look to any changes in the business plan. Which workout model would a turnaround advisor most likely suggest if he feels the current management is resistant to any changes in strategy to keep the business alive?

A) Restructure
B) Replacement
C) Renewal
D) Retrenchment

Question 29

Which workout model involves significant restructuring of the organizational structure and removing inefficient practices?

A) Restructure
B) Replacement
C) Renewal
D) Retrenchment

Question 30

Antwiser Butch Beer's organizational structure of top management involved all of the heirs of the original founders of company 100 years ago. Only two of the eight top managerial heirs actually work for the company, while the other six only draw a large substantial salary. Additionally, the company is currently plagued with a money losing division that sells yeast. Bev Inn, a turnaround advisor, suggests that the six unproductive heirs be fired and the two remaining heirs continue on as managers and the company stops yeast production. This is an example of which type of workout models?

A) Revival
B) Repositioning
C) Replacement
D) Renewal

Question 31

A major disadvantage to a workout is that

A) It involves a lengthy court proceeding.
B) It is very expensive.
C) An unwilling creditor cannot be forced to accept the plan.
D) Generally it requires the creditor to lose some money.

Question 32

An alternative to a bankruptcy is a(n) __________ which is a form of a liquidation.

A) Assignment for the benefit of creditors
B) Resolution sale
C) Guarantor liquidation sale
D) Citation to discover assets

Question 33

Another name for a creditor in an ABC is a(n)

A) Debtor
B) Assignee
C) Assignor
D) Surety

Question 34

All of the following are part of the assignment for the benefit of creditor process except

A) The assignee gives notice to the creditors of the assignment.
B) A professional liquidation firm takes possession of the assets and arranges to sell them.
C) The assignee reviews all claims made on the assets.
D) The assignee files the necessary documents for forfeiture.

Question 35

In an assignment for the benefit of creditors there is a fiduciary duty to work in the best interests of the

A) Creditor
B) Debtor
C) Bank
D) Government

Question 36

As a result of an ABC, a bar date of was set on January 1^st. Bob, a creditor filed a claim on January 15^th. What most likely will be the outcome of the of Bob's claim?

A) If the court determines it is legitimate it will allow it.
B) The TA will determine if the claim is legitimate.
C) The claim will be disallowed.
D) The claim will be put at the lowest priority.

Question 37

In Akin Bay Company v. Von Kahle, the court ruled

A) The assignee cannot stand in any better position than the assignor.
B) The assignee and the assignor must always be in the same position.
C) The assignee must stand in a better position than the assignor.
D) It is up to the court's discretion to determine between the assignee and assignor of which should be in the better position.

Question 38

Al's Automotive is in the process of going through an ABC. After distributing all the fund to any creditor that has a lien on the asset, $20,000 still remains. What will happen to that amount of money next?

A) It will be used to pay all unsecured creditors.
B) It will be used to pay the fees and costs associated with administering the transaction.
C) It will be given back to the Al's Automotive as surplus.
D) It will be given to the state government.

Question 39

During an ABC, it is determined that the funds from the sale of assets is not sufficient to pay all of the liens in full. What will be done in this situation?

A) The creditors will be paid in the order in which the filed their claim on a first come first served basis.
B) The unsecured creditors will be paid first.
C) The creditors possessing a valid lien will receive pro rata payments.
D) The money will be held in trust.

Question 40

Which of the following statements is correct about the ABC process for a corporation?

A) Only the shareholders must approve it.
B) Only the board of directors must approve it.
C) Only the executive officers must approve it.
D) Both the board of directors and the shareholders must approve it.

Question 41

A nonstatutory option in which a venture simply ceases operations without paying creditors is called

A) Lights-out option
B) Foreclosure
C) Termination of existence
D) Final dissolution

Question 42

When a business employs the lights out option

A) All debts are extinguished.
B) The court will require that the debtor liquidate assets and put them in trust for future creditor claims.
C) The business' debts are still valid and the creditor may pursue a debt collection lawsuit.
D) The court will order the debtor to immediately pay all debts to creditors.

Question 43

In Penske Truck Leasing Co. v. Cool Trans NJ, the recognized all the following roles of the assignee except

A) The assignee stands in the shoes assignor.
B) The assignee has the power to act as successor.
C) The assignee represents the assignor's entire creditor constituency.
D) The assignee has a right force bankruptcy.

Question 44

What is the advantage of a business using a workout model rather than bankruptcy?

Question 45

Explain the role of a turnaround advisor and what types of assistance he may provide in the workout process.

Question 46

Monkey Business Corp. has been in business for over 100 years and to date, the leaders have been made up of all the relatives of the original founder, C.M. Panzee. In fact, before a new member joins the leadership they sign a symbolic oath that specifically states, "our business practices have not changed in over 100 years… and we are proud of that." Unfortunately, Monkey Business have been insolvent for over a year and the leaders have not indicated that they plan on making any changes as they believe it would dishonor the legacy of C.M. Panzee. Due to the insolvency, a TA is hired. Given the facts stated above, which type of workout model would be the best model to follow?

Question 47

Briefly explain the process involved in the Assignment for the Benefit of Creditors (ABC).