Question: What are the major differences between an informal reorganization and reorganization in bankruptcy? In answering this question, be sure to discuss the following items: (1)

What are the major differences between an informal reorganization and reorganization in bankruptcy? In answering this question, be sure to discuss the following items: (1) Common pool problem, (2) Holdout problem, (3) Automatic stay, (4) Cram down, and (5) Fraudulent conveyance.

MINI CASE

Kimberly Mackenzie, president of Kim's Clothes Inc., a medium-sized manufacturer of women's casual clothing, is worried. Her firm has been selling clothes to Russ Brother’s department store for more than ten years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim's Clothes $65,000 for spring sportswear that was delivered to the store just two weeks ago. Kim's concern was brought about by an article that appeared in yesterday's Wall Street Journal that indicated that Russ Brothers was having serious financial problems. Further, the article stated that Russ Brothers' management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court. Kim's immediate concern was whether or not her firm would collect its receivables if Russ Brothers went bankrupt. In pondering the situation, Kim also realized that she knew nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim asked Ron Mitchell, the firm's chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:

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There are many differences between voluntary reorganizations and reorganizations in bankruptcy Voluntary reorganizations are far less costly and relat... View full answer

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