Chapter 11

What is the fundamental distinction between a Chapter 11 filing and a Chapter 7 filing under the Bankruptcy Code?

1. A.Chapter 11 provides for reorganization and continued operation; Chapter 7 provides for liquidationCorrect. This is the fundamental distinction between the two chapters.
2. B.Chapter 11 applies only to individuals, while Chapter 7 applies only to corporationsWrong. Both chapters can apply to corporate debtors; the distinction is reorganization versus liquidation, not individual versus corporate.
3. C.Chapter 7 always results in a higher recovery for unsecured creditors than Chapter 11Wrong. There is no general rule that liquidation produces higher unsecured recoveries than reorganization; it depends on the specific facts.
4. D.Chapter 11 and Chapter 7 are two names for the identical legal processWrong. They are distinct processes with different purposes — reorganization versus liquidation.

Why: Chapter 11 provides a framework for a company to reorganize and continue operating (typically under a court-approved plan of reorganization), while Chapter 7 provides for liquidation of the company's assets and the winding down of the business, generally by a trustee.

A distressed company in Chapter 11 seeks court approval to sell substantially all of its operating assets to a buyer under Bankruptcy Code Section 363, rather than waiting to sell those assets through a confirmed plan of reorganization. What is a key practical advantage of a Section 363 sale in this context?

1. A.It permits a relatively fast, court-approved sale free and clear of most liens, without waiting for plan confirmationCorrect. Speed and free-and-clear treatment are the key practical advantages of a Section 363 sale.
2. B.It requires no court approval whatsoeverWrong. A Section 363 sale still requires bankruptcy court approval; it is not an unsupervised private sale.
3. C.It automatically extinguishes the buyer's obligation to pay any purchase priceWrong. The buyer still pays the agreed purchase price; Section 363 addresses the treatment of liens and claims against the assets, not payment obligations.
4. D.It is available only to Chapter 7 trustees, never in a Chapter 11 caseWrong. Section 363 sales are commonly used in Chapter 11 cases, which is exactly the context described here.

Why: A Section 363 sale allows a bankruptcy court to approve a sale of assets "free and clear" of most liens and claims relatively quickly, without waiting for the lengthier plan confirmation process — providing speed and certainty for a distressed business (and its creditors) that may not be able to wait out a full reorganization plan timeline.

Debtor-in-possession (DIP) financing, obtained after a company files for Chapter 11, is best described as:

1. A.Financing that is automatically subordinated to all pre-existing unsecured claimsWrong. DIP financing is typically negotiated with priority or priming status, not automatic subordination to existing unsecured claims.
2. B.A type of equity security issued only to common shareholders after emergence from bankruptcyWrong. DIP financing is extended during the Chapter 11 process, not as an equity issuance after emergence.
3. C.A government grant available to any company that files for bankruptcyWrong. DIP financing is private lending, not a government grant program.
4. D.Financing extended to fund operations after a company has filed for Chapter 11, typically with priority repayment statusCorrect. This is the core concept of DIP financing.

Why: DIP financing is new, post-petition financing extended to a company after it has filed for Chapter 11, used to fund continued operations during the reorganization process — it is typically negotiated with priority or priming status over certain pre-existing claims, given the higher risk lenders take on financing a company in bankruptcy.