Advanced Accounting by Debra Jeter and Paul Chaney Chapter 10: Insolvency- Liquidation and reorganization Slides Authored by Scott D. Hanson Dickinson State University

Bankruptcy – Chapter 7 Bankruptcy Reform Act of 1978 Commonly known as “Liquidation” Cease all operations Trustee is assigned by the bankruptcy court Trustee sells (liquidates) assets Trustee pays off creditors Court voids all contracts Court forgives any unpaid debts. obj 1

Bankruptcy – Chapter 11 Bankruptcy Reform Act of 1978 Commonly known as “reorganization” Continue operations Court appoints creditor committee and possibly a trustee Committee works with company management to develop reorganization plan Court alters or voids contracts and debts as needed. obj 1

Unsecured Claims Categories in Order of Priority Administration expenses, fees and charges incurred in administering the bankruptcy. Wages, salaries & commissions earned by employees in 90 days before filing (<$4,650) Amounts owe to employee benefit plans for services provided in previous 180 days. obj 2

Unsecured Claims Categories in Order of Priority (cont.) 4. Repayment of up to $2,100 to any individual who prepaid for purchase, lease, rent of property or services not delivered or performed. 5. Unpaid taxes. obj 2

Bankruptcy Petition Voluntary - the debtor files for bankruptcy “protection” from the court. Involuntary – creditor or creditors file bankruptcy petition requesting court either liquidates or reorganizes debtor company. obj 3

Creditors in a Bankruptcy Creditors are owed payment, goods or services by a debtor. Creditor claims are: - Fully Secured - Partially Secured - Unsecured obj 4

Classes of Creditors Fully Secured – 100% or more of the amount owed is secured by a lien or pledge of specific assets. Partially Secured – some portion less than 100% of the amount owed is secured by a lien or pledge of specific assets. Unsecured – No portion of amount owed is secured by lien or pledge of specific assets. obj 4

Contractual Agreements outside Bankruptcy An extension of payment periods Composition agreements – partial payment Creditors’ committee – manages business Voluntary assignment of assets with a trustee for the benefit of the creditors obj

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