Presentation Transcript

1. Managing Bankruptcy and Insolvency IssuesChapter 13

   FIN 292 Accounting & Finance for Entrepreneurs
2. Pros • When you file bankruptcy, it stops all collection actions by creditors, including foreclosures, repossessions, and garnishments• Most states allow you to exempt your home, car and other essentials, so you will not wind up homeless and unable to get around. • Declaring bankruptcy now can get you started sooner on rebuilding your credit and your life. If there is another disaster, you may be able to amend your existing Chapter 13 plan to accommodate it. • While nothing will get rid of student loan debt, at least bankruptcy will prevent your lenders from aggressive collection action. • So is being sued for bad debts, having your car repossessed or your home foreclosed on. • If your creditors sue you, your name will be in court records and may appear in the newspaper. • Both judges and trustees have heard far worse stories than yours. • Credit cards helped you get into this mess. They can get you into another one just as quickly.
3. Cons • You will lose all your credit cards (unless you pay them off before filing.) You may also have to give up some luxury possessions. • A recent bankruptcy makes it nearly impossible to get a mortgage (although you should be able to do so within about five years). • A bankruptcy stays on your credit report for 10 years, making it difficult to acquire credit, buy a home or car, get life insurance, or sometimes get a job. • Not all debts may be "discharged" in a bankruptcy. Student loans and back taxes (within 3 years) are prime examples. • Bankruptcy is an admission of defeat, an embarrassment. • If I declare bankruptcy, my name will be in court records and may appear in the newspaper. • You will have to explain to a judge or trustee how you got into a financial mess. • It will be a long time before you are able to get credit cards again.
4. Bankruptcy: Which Flavor is Best? There are two types of personal bankruptcy. You will need to choose which one suits your circumstances. Chapter 13 - ReorganizationIf you have a regular income and limited debt, you may keep property, such as a mortgaged house or car that you otherwise might lose. In Chapter 13, the court approves a repayment plan that allows you to pay off a default during a period of three to five years, rather than surrender any property.
5. Bankruptcy: Which Flavor is Best? Chapter 7 - Discharge of DebtInvolves liquidating all assets that are not exempt. Exempt property may include cars, work-related tools and basic household furnishings. Some property may be sold by a court-appointed official a trustee or turned over to creditors. You can receive a discharge of your debts under Chapter 7 only once every six years.
6. The Process Chapter 7 The initial filing is the first step. You or your agent will file several forms with the bankruptcy court listing income and expenses, assets, debts and property transactions for the past two years. Be honest. Be sure to list everything you owe. The fee for this filing is $200. It may be waived for people who receive public assistance or live below the poverty level. A court-appointed trustee is assigned to oversee your case. About a month after filing, you must attend a "meeting of creditors" where the trustee reviews your forms and asks any questions. Despite the name, creditors rarely attend. At this meeting, you must declare any nonexempt property and give it (or its value in cash) to the trustee. Normally, this meeting lasts about five minutes. Three to six months later, you receive a notice from the court that "all debts that qualified for discharge were discharged." Your case is then over. Then your case is over.
7. The Process Chapter 13 You file the same forms as above plus a proposed repayment plan, in which you describe how you intend to repay your debts over the next three, or in some cases five, years. The filing fee is $185 and, unlike the Chapter 7 fee, cannot be waived. A trustee is assigned to oversee the case. As in Chapter 7, you attend the meeting of creditors. Often one or two creditors attend this meeting, especially if they don't like something in your plan. After the meeting of the creditors, you attend a hearing before a bankruptcy judge who either confirms or denies your plan. If your plan is confirmed, and you make all the payments called for under your plan, you often receive a discharge of any balance owed at the end of your case.
8. I. DEFINITIONS OF FAILURE A. Economic Failure; revenues do not cover expenses. B. Business Failure; termination resulting in loss to creditors, C. Technical Insolvency: firm cannot meet maturing obligations, D. Technical Bankruptcy: Value of assets < value of liabilities,
9. I. DEFINITIONS OF FAILURE E. Bankruptcy Code (1979) Involuntary; debtor unable to pay debts as they become due. Creditors petition court Acts of Bankruptcy deleted.
10. I. DEFINITIONS OF FAILURE F. Out-of-Court Remedies; 1. Necessary conditions; a. Debtor is good moral risk. b. Debtor must show ability to make a recovery. c. General business conditions must be favorable. 2. Extension; postpone due date. 3. Composition; creditors agree to take less. 4. Creditor committees; lenders assume management. 5. Assignment; Requires agreement as to liquidation values, and priority.
11. II. CAUSES OF FAILURE A. Managerial Incompetence. The most frequently cited cause of failure is managerial incompetence. This definition covers a wide assortment of management blunders; poor investments, poor controls, inadequate planning, unresponsiveness to market requirements, etc.
12. Federal Bankruptcy Code - Title 11 of the U.S. Code.Title 11 is currently subdivided into eight chapters: Chapter 1. General Provisions, Definitions and Rules of Construction Chapter 3. Case Administration Chapter 5. Creditors, the Debtor, and the Estate Chapter 7. Liquidation Chapter 9. Adjustment of the Debts of Municipality Chapter 11. Reorganization Chapter 12. Adjustment of the Debts of a Family Farmer with Regular Annual Income Chapter 13. Adjustment of the Debts of An Individual With Regular Income
13. General Commentwww.law.cornell.edu/wex/index.php/Bankruptcy Bankruptcy law is federal statutory law contained in Title 11 of the United States Code. Congress passed the Bankruptcy Code under its Constitutional grant of authority to "establish... uniform laws on the subject of Bankruptcy throughout the United States." SeeU.S. Constitution Article I, Section 8.  States may not regulate bankruptcy though they may pass laws that govern other aspects of the debtor-creditor relationship. SeeDebtor-Creditor A number of sections of Title 11 incorporate the debtor-creditor law of the individual states.
14. III. FEDERAL BANKRUPTCYUS Code, Title 11 (Jan-2-2006) A. Chapter 7; Liquidation; When company cannot reasonably be expected to be made a going concern again, the court generally orders a liquidating of assets. The proceeds are used to pay off the creditors (by Rule of Absolute Priority – See Chap. 5). 1. Provides safeguards against fraud. 2. Provide equitable distribution of assets. 3. Discharge all obligations: debtors can restart without burden of former debt.
15. FEDERAL BANKRUPTCYUS Code, Title 11 (Jan-2-2006) C. The Rule of Absolute Priority; Chapter 5, Section 507 1. Secured creditors; mortgage bondholders. 2. Administrative expenses allowed under section 503(b). 3. Third, unsecured claims allowed under section 502(f) of this title. 4. Allowed unsecured claims, but only to the extent of $10,000 earned within 180 days of filing. 5. Allowed unsecured claims for contributions to an employee benefit plan…services rendered with 180 days of filing.
16. The Rule of Absolute Priority Allowed unsecured claims of persons but only to the extent of $4,925 for each such individual. Allowed unsecured claims of individuals, to the extent of $2,225 for each such individual, arising from the deposit Allowed unsecured claims of governmental units, only to the extent that such claims are for taxes for a taxable year on or before the date of filing the petition.
17. The Rule of Absolute Priority Allowed unsecured claims based upon any commitment by the debtor to a Federal depository institutions regulatory agency . Allowed claims for death or personal injury resulting from the operation of a motor vehicle or vessel if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance D. Satisfaction of Creditor Claims 1. Assignment of assets 2. Cash payments
18. FEDERAL BANKRUPTCYUS Code, Title 11 (Jan-2-2006) B. Chapter 11; Reorganization Firm's debt is restructured to allow the orderly payment of creditors while the company regains its financial health. 1. Reorganization of repayment schedules; lengthen maturities 2. Some debt may be permanently dismissed. 3. Debt frequently has interest rates lowered. 4. Evaluates current management. 5. Determine if merger with healthy firm is best.