 BANKRUPTCY Procedures and Outcomes Andrew Pickett

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: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 7  Chapter 9: municipal bankruptcy; a federal mechanism for the resolution of municipal debts Chapter 9  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 11  Chapter 12: rehabilitation for family farmers and fishermen; Chapter 12  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 13  Chapter 15: ancillary and other international cases; provides a mechanism for dealing with bankruptcy debtors and helps foreign debtors to clear debts. Chapter 15

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, Print.  Wikipedia, the Free Encyclopedia.Web. 03 May  "Corporate Bankruptcy." U.S. Securities and Exchange Commission (Home Page). Web. 03 May  "An Overview Of Corporate Bankruptcy." Investopedia.com - Your Source For Investing Education. Web. 03 May