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BANKRUPTCYKen BakondiKara Brausen
Bankruptcy
Defined History Statistics Chapter 11 Chapter 7 Questions?
Bankruptcy Defined
Financial Distress – When cash flows are not sufficient to meet current obligations
Bankrupt – When a petition is filed with one of nearly 300 Federal Bankruptcy Courts
Provides Protection from Creditors
Discharge of Debts
History of Bankruptcy Legislation 1789 – U.S Constitution 1800 – First U.S. Bankruptcy Law 1898 - Nelson Act 1938 - Chandler Act 1978 - Bankruptcy Reform Act 1984 – Bankruptcy Amendment Act 1986 – Chapter 12 "family
farmer/fisherman" 2005 – Consumer Protection Act
Bankruptcy Reform Act of 1978 Eliminated even numbered chapters Chapters 1,3,5 – General bankruptcy
provisions Chapter 7 – Personal and Business
Liquidation Chapter 9 – Municipalities (Orange County) Chapter 11 – Business Reorganizations Chapter 13 – Personal with Income Chapter 15 – Trustees for Administration Chapter 12 – Family owned farms (1986)
Consumer Protection Act 2005 Extended time between discharges Denial of discharge if the debtor received a
Chapter 7 or 11 discharge in a case filed within 8 years of the filing of the pending case
Chapter 13 instead of Chapter 7 Production of tax returns and other
documents Audits Credit counseling and debtor education
Bankruptcy Statistics
Bankruptcy Statistics
Total U.S. Business Filings
Bankruptcy Statistics
Bankruptcy Statistics
Total Assets in all Publicly Traded Company Filings between 2001 and 2007?
$1,023,100,000,000
Total Assets 2 largest filings of 2008? $1,018,976,000,000
2008 Total $1.16 Trillion
Largest U.S. Filings
Company Date Total Assets Pre-bankruptcy
Lehman Brothers Holdings, Inc.
9/15/2008 $691,063,000,000
Washington Mutual 9/26/2008 $327,913,000,000
Worldcom, Inc. 7/21/2002 $103,914,000,000
Enron Corp. 12/02/2001
$65,503,000,000
Conseco Inc. 12/17/2002
$61,392,000,000
Chrysler 4/30/2009 $39,300,000,000
Thornburg Mortgage 5/01/2009 $36,521,000,000
Pacific Gas and Electric Co.
4/6/2001 $36,152,000,000
Texaco 4/12/1987 $34,940,000,000
Financial Corp. of America
9/9/1988 $33,864,000,000
General Motors, Corp.
http://finance.yahoo.com/q/bs?s=GM&annual
CHAPTER 11: REORGANIZATION
“intensive care”
Chapter 11: Key Process Features Voluntary petition Involuntary petition Automatic stay Exclusivity period Debtor-in-Possession financing Absolute priority rule
Chapter 11 Process
1. File petition of relief2. Submit schedule of assets & liabilities3. Bar date4. Reorganization plan & disclosure statement5. Hearing on reorganization plan6. Vote on plan7. Confirmation hearing8. Set effective plan date & distribution
schedule
Common Pool
When individual creditors have the incentive to foreclose on the venture even though it is worth more as a going concern.Example:
Firm’s Going Concern Value = $3,000,000 BV of Debt Owed = $4,000,000Assets Liquidation Value = $2,000,000
Return as a Going Concern = .75 per $1 of loan
Return if Liquidated = .50/$1 loaned
Holdout Problem
When one or more of the creditors refuse to agree to reorganization terms because of the potential for larger individual recovery.
Cram-down
Bankruptcy court accepts a reorganization plan for all creditors including dissenting creditor classes.
Groups: Employees Consumers Federal/State/Local tax collection agencies Secured Creditors General Creditor Claims Preferred Stockholders Common Stockholders
Cram-down Scenario
Proposed Plan: Employees Compensation Owed up to $2,000 Consumers Compensation Owed up to
$900 Federal/State/Local Taxes Payment Plan Structured Secured Creditors Collateral $, 2 yr pmt plan General Creditor Claims $1000, remaining 5 yr pmt
plan Preferred Stockholders Issued New Shares of Stock Common Stockholders Issued New Shares of Stock
Chapter 11 – Success/Failure
CHAPTER 7: LIQUIDATION
“death”
Chapter 7 Liquidation
Accounts for 65% of all business bankruptcies filed
90% of Chapter11’s end this way
85%+ of all business bankruptcies result in liquidation
Chapter 7 Liquidation
Liquidation value of assets today exceeds going concern value
Substantial doubt firm will continue as a going concern
Prevents management from transferring assets
Owners want out
Chapter 7: Liquidation
Distribution of assets based on absolute priority rule
1) Administrative Costs
2) Wages/Unpaid Employee Benefits
3) Consumer Claims
4) Taxes
Chapter 7: Liquidation
5) Secured Creditors
6) Unfunded Pension Liability
7) Unsecured Creditors
8) Preferred Stockholders
9) Common Stockholders
Questions?