Compare Chapter 7 and Chapter 11. What is the automatic stay, what is a debtor-in-possession, and why do most large corporate cases file Chapter 11 rather than Chapter 7?

What interviewers are actually testing

RX interviews are the most technical in banking, and the questions cluster around a few load-bearing ideas. The interviewer wants to see that you think like a creditor dividing a fixed pie.

First, the waterfall and absolute priority. Can you recite the stack (secured, superpriority/DIP, admin, unsecured, subordinated, equity) and explain that each tier is paid in full before the next? This is table stakes; fumbling it ends the interview.

Second, the fulcrum security. This is the RX concept. A strong candidate can define it (the tranche where enterprise value runs out, which converts to new equity), find it given a cap structure and an EV, and explain why distressed funds target it to gain control. If you can walk value down a waterfall and point to the class that 'breaks,' you're speaking their language.

Third, Chapter 11 mechanics. Chapter 11 (reorganize, DIP, keep operating) vs Chapter 7 (liquidate). The automatic stay (freezes everything). DIP financing (superpriority new money). The plan, class voting (two-thirds by amount, one-half by number), and cramdown (bind a dissenting class if the plan is fair and equitable). 363 sales and stalking-horse bids.

Fourth, in-court vs out-of-court and the holdout problem. Why try out-of-court first (cheaper, faster, less destructive)? Why does it fail (holdouts demanding par)? Why is the threat of Chapter 11 the source of leverage (cramdown defeats holdouts)? What's a pre-pack? This is where you show you understand RX as a negotiation, not just a legal process.

The strongest signal is framing everything from the creditor's seat: 'given this EV and this cap structure, the fulcrum is the second-lien, so I'd buy second-lien paper below par to convert into control of the reorg.' That single sentence shows you can do the job. Also useful: RX is counter-cyclical: it booms in downturns when M&A and financing dry up, which is a genuine, honest reason to want the group.

Common traps

Trap 1: Confusing balance-sheet and cash-flow insolvency. They're different failures. A company with assets > liabilities can still be forced to file if it can't make a payment; a company with liabilities > assets can operate for years if it services interest.

Say it out loud: "Balance-sheet insolvency is liabilities exceeding assets; liquidity insolvency is being unable to meet payments as they come due. A company can be one without the other: what actually triggers a filing is a missed payment or an uncurable covenant breach, not low profits."

Trap 2: Getting the waterfall order wrong. The order is secured, then superpriority/DIP and admin, then unsecured, then subordinated, then equity. Candidates routinely put unsecured bonds ahead of secured loans or forget the DIP sits on top.

Say it out loud: "Value flows secured first, then DIP and administrative claims, then senior unsecured, then subordinated debt, and equity last. Each tier is paid in full before the next receives anything: that's the absolute priority rule."

Trap 3: Misidentifying the fulcrum as the most senior unpaid tranche or the most junior. The fulcrum is the tranche where cumulative claims cross enterprise value: the one partially covered.

Say it out loud: "The fulcrum is where value breaks: you walk claims down the waterfall until enterprise value runs out partway through a tranche. That partially-covered tranche is the fulcrum, and it's what converts into the new equity of the reorganized company."

Trap 4: Thinking equity always gets zero, or that it's guaranteed zero. Equity is usually wiped out under absolute priority, but not always: if EV exceeds all debt claims (solvent restructuring), or if senior creditors give old equity a small recovery to buy consent and speed, it can recover something.

Say it out loud: "Under absolute priority equity is last and usually wiped out, but not by law guaranteed zero. If enterprise value covers all the debt, or if seniors hand equity a token 'tip' to avoid a fight and get the plan done faster, old equity can keep a sliver."

Trap 5: Believing out-of-court is always better and Chapter 11 is failure. Out-of-court is cheaper but is blocked by holdouts. Chapter 11's cramdown is precisely the tool that solves holdouts: the threat of filing is leverage, and a pre-pack can be faster than a messy exchange.

Say it out loud: "Out-of-court is cheaper but needs near-unanimity, so holdouts can extort par. Chapter 11 lets you cram down a class with two-thirds by amount and half by number, so the threat of filing is the banker's leverage, and a pre-pack files a pre-agreed plan to bind holdouts in weeks."

Trap 6: Saying DIP financing is just a normal loan. DIP loans carry superpriority (ahead of pre-petition debt), often priming liens, and tight controls: that's why lenders provide them and why they're strategically valuable for gaining influence over the case.

Say it out loud: "DIP financing isn't ordinary debt: it's superpriority new money that sits ahead of pre-petition claims, often with priming liens and milestones. Lenders compete to provide it because it's safe and gives them control over how the case runs."