1. Law for Business Mr. Bernstein Notes, pp 624-626 What is Bankruptcy? January 13, 2015

2. Law for Business Mr. Bernstein Importance of Bankruptcy Laws Sound Bankruptcy Laws promote risk-taking in an economic system by clarifying potential outcomes Business owners have a path to a restart Creditors understand the process for distributing remaining assets of a failed business The US Constitution specifically grants Congress exclusive power to establish Bankruptcy Laws 2

3. Law for Business Mr. Bernstein Bankruptcy Laws Chapter 7: Liquidation Personal or Business Trustee liquidates all assets and distributes them amongst claims States can establish relatively minor exemptions Some claims cannot be discharged: taxes, alimony, child support, judgments for intentional torts, student loans Cannot declare Chapter 7 Bankruptcy twice within 6 years 3

4. Law for Business Mr. Bernstein Bankruptcy Laws Chapter 11: Reorganization Used primarily by corporations Litigation and debt collection against business is placed on hold Plan is created for dispensing some obligations and redistributing remaining assets, often with the business entity continuing operations with a prospect of profitability going forward Plan is voted on by various creditors 4

5. Law for Business Mr. Bernstein Bankruptcy Laws Chapter 11: Reorganization Allows continuation of operations while a restructuring of finances is designed and implemented. Provides an orderly process which gives potential lenders or investors greater comfort to work with higher-risk businesses. Allows restructuring of businesses in a way which is less disruptive to employees and other stakeholders. 5

6. Law for Business Mr. Bernstein Rationale for Bankruptcy Chapter 11 $$ Value of a business reorganized into a going concern > $$ Value of sum of parts liquidated individually Some goodwill may exist in business franchise even if it cannot pay its bills More value is therefore available to pay creditors 6