BANKRUPTCY Procedures and Outcomes Andrew Pickett S History Bankruptcy Act of 1898 Nelson Act Bankruptcy Act of 1938 Chandler Act Bankruptcy Reform Act of 1978 What is Bankruptcy Gives debtors who are unable to meet their debt obligations a mechanism for formulating a plan to resolve their debts through an allocation of their assets among their creditors Liquidation Reorganization Bankruptcy Code Six types of bankruptcy under the Bankruptcy Code Chapter 7 basic liquidation for individuals and businesses also known as straight bankruptcy it is the simplest and quickest form of bankruptcy available Chapter 9 municipal bankruptcy a federal mechanism for the resolution of municipal debts Chapter 11 rehabilitation or reorganization used primarily by business debtors but sometimes by individuals with substantial debts and assets known as corporate bankruptcy it is a form of corporate financial reorganization which typically allows companies to continue to function while they follow debt repayment plans Chapter 12 rehabilitation for family farmers and fishermen Chapter 13 rehabilitation with a payment plan for individuals with a regular source of income enables individuals with regular income to develop a plan to repay all or part of their debts also known as Wage Earner Bankruptcy Chapter 15 ancillary and other international cases provides a mechanism for dealing with bankruptcy debtors and helps foreign debtors to clear debts Bankruptcy Code ctd Most common type for individuals are Chapters 7 13 Corporations and other business forms file under either Chapters 7 or 11 As much as 65 of all U S consumer bankruptcy filings are Chapter 7 cases Chapter 7 Liquidation All the assets of a corporation will be distributed to holders of claims on the corporation and no corporate entity will survive Claimholders receive cash disbursements Absolute Priority Rule Chapter 11 Reorganization New corporate entity Claimholders can receive cash securities in the newly reorganized corporation or a combination of both Often violate the Absolute Priority Rule Chapter 11 Reorganization ctd Process Committee representing various claimholders appointed to formulate plan of reorganization Negotiation process usually long Creditors often convince equity holders to accept the plan by offering to distribute some value to them For reorganization plan to be approved Approval from the court 2 3 approval from the number of claims voting 2 3 approval from outstanding shares of each class of interests Recent Developments Bankruptcy Abuse Prevention and Consumer Protection Act BAPCPA Published in 2005 and amended the Bankruptcy Code Individual bankruptcy Means test Those with the ability to pay will be required to pay at least a portion of their debts Those who fall behind their state s median income will not be required to pay back debts More difficult for serial filers to abuse generous bankruptcy protections 8 year rule Questions Sources Fabozzi Frank J Franco Modigliani and Frank Joseph Jones Foundations of Financial Markets and Institutions Boston MA Pearson Addison Wesley 2010 Print Wikipedia the Free Encyclopedia Web 03 May 2011 http en wikipedia org Corporate Bankruptcy U S Securities and Exchange Commission Home Page Web 03 May 2011 http www sec gov investor pubs bankrupt htm An Overview Of Corporate Bankruptcy Investopedia com Your Source For Investing Education Web 03 May 2011 http www investopedia com articles 01 120501 asp
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