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Bankruptcy and Default- Creditors' Concessions

In a troubled debt situation, why might the creditor grant concessions to the debtor?

b. What type of concessions might a creditor grant the debtor in a troubled debt situation?

c. What is meant by "impairment" of a loan? Under what circumstances should a creditor or debtor recognize an impaired loan?

Solution Preview

a) If a debtor becomes bankrupt and has to officially declare "bankruptcy", then he/she gains sort of a "fresh start." Basically, the amounts owed to creditors would be eliminated ultimately, and creditors may no longer persist in any current legal actions against the debtor or pursue any future legal action. Therefore, creditors would no longer be able to legally collect, thus enforce, the debt owed to them by the debtors who have declared "bankruptcy." Although, debtors would still have to give any surplus income from all his/her accounts, this may be a very small percentage (or barely anything) of the original amount creditors gave these debtors in the first place.

Hence, creditors are motivated to grant concessions to ...

Solution Summary

The solution looks at the motivation behind the concessions that creditors may grant to debtors in troubled financial situations, as well as the implications if a debtor were to declare bankruptcy. The tools that creditors may use to alleviate a troubled financial situation, before escalation to bankruptcy, are described. Additionally, the definition and implications of an impairment of a loan are explained.