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Transcript of BANKRUPTCY Ken Bakondi Kara Brausen. Bankruptcy Defined History Statistics Chapter 11 Chapter 7...
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BANKRUPTCYKen BakondiKara Brausen
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Bankruptcy
Defined History Statistics Chapter 11 Chapter 7 Questions?
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Bankruptcy Defined
Financial Distress – When cash flows are not sufficient to meet current obligations
Bankrupt – When a petition is filed with one of nearly 300 Federal Bankruptcy Courts
Provides Protection from Creditors
Discharge of Debts
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History of Bankruptcy Legislation 1789 – U.S Constitution 1800 – First U.S. Bankruptcy Law 1898 - Nelson Act 1938 - Chandler Act 1978 - Bankruptcy Reform Act 1984 – Bankruptcy Amendment Act 1986 – Chapter 12 "family
farmer/fisherman" 2005 – Consumer Protection Act
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Bankruptcy Reform Act of 1978 Eliminated even numbered chapters Chapters 1,3,5 – General bankruptcy
provisions Chapter 7 – Personal and Business
Liquidation Chapter 9 – Municipalities (Orange County) Chapter 11 – Business Reorganizations Chapter 13 – Personal with Income Chapter 15 – Trustees for Administration Chapter 12 – Family owned farms (1986)
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Consumer Protection Act 2005 Extended time between discharges Denial of discharge if the debtor received a
Chapter 7 or 11 discharge in a case filed within 8 years of the filing of the pending case
Chapter 13 instead of Chapter 7 Production of tax returns and other
documents Audits Credit counseling and debtor education
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Bankruptcy Statistics
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Bankruptcy Statistics
Total U.S. Business Filings
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Bankruptcy Statistics
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Bankruptcy Statistics
Total Assets in all Publicly Traded Company Filings between 2001 and 2007?
$1,023,100,000,000
Total Assets 2 largest filings of 2008? $1,018,976,000,000
2008 Total $1.16 Trillion
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Largest U.S. Filings
Company Date Total Assets Pre-bankruptcy
Lehman Brothers Holdings, Inc.
9/15/2008 $691,063,000,000
Washington Mutual 9/26/2008 $327,913,000,000
Worldcom, Inc. 7/21/2002 $103,914,000,000
Enron Corp. 12/02/2001
$65,503,000,000
Conseco Inc. 12/17/2002
$61,392,000,000
Chrysler 4/30/2009 $39,300,000,000
Thornburg Mortgage 5/01/2009 $36,521,000,000
Pacific Gas and Electric Co.
4/6/2001 $36,152,000,000
Texaco 4/12/1987 $34,940,000,000
Financial Corp. of America
9/9/1988 $33,864,000,000
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General Motors, Corp.
http://finance.yahoo.com/q/bs?s=GM&annual
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CHAPTER 11: REORGANIZATION
“intensive care”
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Chapter 11: Key Process Features Voluntary petition Involuntary petition Automatic stay Exclusivity period Debtor-in-Possession financing Absolute priority rule
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Chapter 11 Process
1. File petition of relief2. Submit schedule of assets & liabilities3. Bar date4. Reorganization plan & disclosure statement5. Hearing on reorganization plan6. Vote on plan7. Confirmation hearing8. Set effective plan date & distribution
schedule
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Common Pool
When individual creditors have the incentive to foreclose on the venture even though it is worth more as a going concern.Example:
Firm’s Going Concern Value = $3,000,000 BV of Debt Owed = $4,000,000Assets Liquidation Value = $2,000,000
Return as a Going Concern = .75 per $1 of loan
Return if Liquidated = .50/$1 loaned
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Holdout Problem
When one or more of the creditors refuse to agree to reorganization terms because of the potential for larger individual recovery.
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Cram-down
Bankruptcy court accepts a reorganization plan for all creditors including dissenting creditor classes.
Groups: Employees Consumers Federal/State/Local tax collection agencies Secured Creditors General Creditor Claims Preferred Stockholders Common Stockholders
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Cram-down Scenario
Proposed Plan: Employees Compensation Owed up to $2,000 Consumers Compensation Owed up to
$900 Federal/State/Local Taxes Payment Plan Structured Secured Creditors Collateral $, 2 yr pmt plan General Creditor Claims $1000, remaining 5 yr pmt
plan Preferred Stockholders Issued New Shares of Stock Common Stockholders Issued New Shares of Stock
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Chapter 11 – Success/Failure
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CHAPTER 7: LIQUIDATION
“death”
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Chapter 7 Liquidation
Accounts for 65% of all business bankruptcies filed
90% of Chapter11’s end this way
85%+ of all business bankruptcies result in liquidation
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Chapter 7 Liquidation
Liquidation value of assets today exceeds going concern value
Substantial doubt firm will continue as a going concern
Prevents management from transferring assets
Owners want out
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Chapter 7: Liquidation
Distribution of assets based on absolute priority rule
1) Administrative Costs
2) Wages/Unpaid Employee Benefits
3) Consumer Claims
4) Taxes
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Chapter 7: Liquidation
5) Secured Creditors
6) Unfunded Pension Liability
7) Unsecured Creditors
8) Preferred Stockholders
9) Common Stockholders
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Questions?