Slide 1Questions to Generate DiscussionQuestions to Generate Discussion cont.Slide 4Brief HistoryBankruptcy Abuse Prevention and Consumer Protection Act of 2005Who Can File for Bankruptcy?How a Corporation Files for BankruptcyTypes of BankruptcyTypes of Bankruptcy cont.Chapter 7Chapter 11Chapter 13Bankruptcy Law-CorporationPrimary PlayersAsset Allocation in Bankruptcy (Absolute Priority Rule)Debtor Benefits in Chapter 11“Fresh Start” AccountingDebtor Benefits in Chapter 13Debtor Benefits in Chapter 7What It Means To Get a DischargeFraudChrysler LLCKey PointsQuestions to generate discussionQuestionsBankruptcyProcedures and OutcomesbyNick SushkovQuestions to Generate Discussion What is bankruptcy?Bankruptcy is a federal court process that can help one eliminate legal responsibility for many of one’s debts or repay them over time under the protection of the bankruptcy court.Why does the law allow people/corporations to file bankruptcy?Bankruptcy laws offer people and corporations in serious debt a way to make a financial fresh start.How can filing bankruptcy limit your life?Consider bankruptcy only as a last resort as it can have a long-term negative impact on your ability to obtain credit, find a job, get insurance or rent a place to live.Questions to Generate Discussion cont.Why do you think that U.S. laws allow people to file bankruptcy?Bankruptcy is a constitutional right in the U.S. because the founding fathers who drafted the Constitution believed that people experiencing financial distress should be able to have a fresh start.Article One, Section Eight of the U.S. Constitution authorizes Congress to enact bankruptcy laws.In other countries, people can be put in prison for not paying their debts, but in the U.S. there is no debtors’ prison.“With apologies to Apple Pie, bankruptcy is as American as it gets. From the earliest days of the Republic to General Motors' June 1 filing for Chapter 11, debt relief has been at the center of a tug-of-war between competing Yankee principles: reinvention and responsibility.” http://www.time.com/time/magazine/article/0,9171,1902827,00.html#ixzz1KlJPZHmLBrief HistoryColonial America–Defaulting on your debts was considered a moral failingRevolutionary War–The first federal bankruptcy law, which drew on English statutes, was signed in 1800 –The Bankruptcy Act of 1898 expanded debt protectionLate 1970–Congress simplified filing for both personal and corporate bankruptcy2005–A stricter lawBankruptcy Abuse Prevention and Consumer Protection Act of 2005Who Can File for Bankruptcy?BusinessesCorporations, Limited Liability Companies, PartnershipsIndividualsHow a Corporation Files for BankruptcyVoluntary Managers realize the firm is insolvent Must file in district in which the majority of the firm’s assets resideInvoluntary Holders, or other creditors file to force the debtor into bankruptcy Just another lawsuit…debtor has the right to defend itselfTypes of BankruptcyForms of Bankruptcy Relief LiquidationReorganizationSix types of bankruptcy:Chapter 7Basic liquidation for individuals and businessesStraight bankruptcyChapter 9 Municipal bankruptcyTypes of Bankruptcy cont.Chapter 11Rehabilitation or reorganizationUsed primarily by businessChapter 12 Rehabilitation for family farmers and fishermenChapter 13Rehabilitation with a payment plan for individuals with a regular source of incomeChapter 15Ancillary and other international casesChapter 7Debt liquidation plan which results in the discharge of most of a debtor’s unsecured debtsDebtor typically receives a discharge about three months from the date his bankruptcy petition is filedAs much as 65% of all U.S. consumer bankruptcy filings are Chapter 7 casesChapter 11Available to every?businessDebtor remains in control of its business operations as a?debtor in possessionResults in reorganization of the debtor's business or personal assets and debtsCourt may convert the case to a Chapter 7 for liquidationMay be dismissedStock may be?delisted?from its primary stock exchangeChapter 13Also called “reorganization” or “repayment” Is an option if one has a source of dependable income but is unable to pay her debtsAllows a debtor to consolidate or restructure her debts and pay them out over a three to five year period Debtor will not receive a discharge until she completes her Chapter 13 plan, usually in three to five yearsBankruptcy Law-CorporationObjective of Bankruptcy Law Primary goal is to maximize the value of the distressed firm’s assetsLiquidationReorganizationMaximizing asset value also maximizes total value available to be distributed to stakeholders SuppliersEmployeesCreditorsShareholdersCost of bankruptcy, and length of bankruptcy cases, are driven by disagreements among stakeholdersPrimary PlayersJudgeDebtorCreditorsBankruptcy TrusteeUnited States TrusteeCreditors CommitteeDebtor in PossessionAsset Allocation in Bankruptcy(Absolute Priority Rule) Assets and new securities are allocated according to the Absolute Priority Rule:Secured claims Debtor-in-possession claimsPriority claims (legal fees, wages,…)General unsecured claimsPreferred stockCommon stockDebtor Benefits in Chapter 11Creditors cannot seek enforcement of liensCreditors cannot seize collateralExisting management team retains control of operationsInterest ceases to accrue on the filing date“Fresh Start” AccountingFresh Start Rule allows a firm that emerges from Chapter 11 to “write-up” asset values to current market value rather than historical costRequires the firm to distribute at least 50% of common stock to creditors Market values assigned by estimating future cash flowsResults in immediately positive book equity and improved financial ratiosDebtor Benefits in Chapter 13For any qualified debtor who wishes to save property from foreclosure or repossessionAllows a debtor to pay a mortgage delinquency over time rather than in a lump sumAllows a homeowner who is with a second mortgage to treat that mortgage as an unsecured debt?Debtor Benefits in Chapter 7Best for any debtor with little or no assetsFor a homeowner who wishes to surrender real property Eliminates the possibility of a deficiency judgmentWhat It Means To Get a DischargeA discharge wipes a