Question

A troubled debt restructuring will generally result in a A. gain by both the debtor and the creditor. B. gain by the debtor and a loss by the creditor. C. loss by the debtor and a gain by the creditor. D. loss by both the debtor and the creditor.

Answer 1

A troubled debt restructuring will generally result in a gain by the debtor and a loss by the creditor.

Correct option is (B)

Debt restructuring means to restructure the debt i.e in the debt restructuring process negotiations take place between the borrower and lender of funds. The need of debt restructuring arises due to the failure on part of the borrower to pay the debt taken by it. When the business of the borrower is not carried out profitably continuously for a long period of time, he may find difficulties in repaying his borrowings. Thus continuous losses or very low profitability of the business makes it difficult for the borrower to repay the debt. Continuous losses in the business reduce the assets of the borrower. Thus his assets become less than of the debt. Even if all the assets are sold, debt cannot be repaid fully. Hence, lenders ultimately get less than their claims. In this way, debtor or borrower gains while the lender or creditor losses in the process of debt restructuring.

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