Tuesday, 17 January 2012

Bankruptcy Analysis

Bankruptcy Info:
Bankruptcy is the legal condition of being unable to repay debts. Bankruptcy can apply to individuals or organizations. There are two types of bankruptcy: voluntary and involuntary.

Voluntary bankruptcy occurs when the debtor, the party that owes money, files for bankruptcy. Involuntary bankruptcy occurs when the creditor, the party that is owed money, files a petition for bankruptcy against the debtor. Voluntary bankruptcy is more common than involuntary bankruptcy.

The idea is to settle the debtor’s debts in an orderly manner that forgives the debt and at least partially repays the creditors. When an entity files for bankruptcy, its assets are valued and arrangements are made to pay off all or some of the entity’s outstanding debt. After successfully completing the bankruptcy proceedings the debtor is relieved of its prior debt obligations and allowed to resume operations.

Bankruptcy laws are stated in the chapters of the Bankruptcy Code. Bankruptcy proceedings take place in Bankruptcy Court.

Bankruptcy Pros,Cons:
There are advantages and disadvantages of bankruptcy proceedings. First, filing for bankruptcy allows an entity facing financial distress to settle its debts and essentially start over again. Second, bankruptcy regulations allow creditors to collect at least a portion of what is owed to them. Also, bankruptcy regulations are a sort of safety net, encouraging entrepreneurial individuals and businesses to take risks.

Bankruptcy Code:
U.S. bankruptcy laws are stated in U.S. Code Title 11 also referred to as the Bankruptcy Code. The code consists of several chapters outlining different bankruptcy categories and procedures. Based on the debtor’s circumstances, the financially distressed debtor can file for bankruptcy under the appropriate chapter. Bankruptcies usually fall into one of two categories: liquidation or reorganization. Bankruptcy proceedings take place in Bankruptcy Courts.

The chapters of U.S. Code Title 11 are:
Chapter 1 - General Provisions

Chapter 3 - Case Administration

Chapter 5 - Creditors, the Debtor, and the Estate

Chapter 7- Liquidation

Chapter 9 - Adjustment of Debts of A Municipality

Chapter 11 - Reorganization

Chapter 12 - Adjustment of Debts of A Family Farmer Or Fisherman With Regular Annual Income

Chapter 13- Adjustment of Debts of An Individual With Regular Income

Chapter 15 - Ancillary and Other Cross-Border Cases

Bankruptcy Chapter 7:Chapter 7 bankruptcy is a type of bankruptcy proceeding outlined in the Bankruptcy Code. Chapter 7 is a liquidation procedure.

When a financially distressed entity files for chapter 7 bankruptcy, the entity ceases operations and a court-appointed trustee sells the entity’s assets. The proceeds from the sale are used to repay creditors. Creditors are repaid in order of seniority.

Chapter 7 bankruptcy is the most common type of bankruptcy. Chapter 7 bankruptcy is often filed for by individuals.

Bankruptcy Chapter 11:Chapter 11 bankruptcy is a type of bankruptcy proceeding outlined in the Bankruptcy Code. Chapter 11 is a reorganization procedure.

When a financially distressed entity files for chapter 11 bankruptcy, the entity continues to operate while it restructures its debt obligations. The entity is given a limited amount of time in which to restructure the debts. During this time the entity is protected from creditors.

Reorganization bankruptcies are usually more complex than liquidation bankruptcies. Chapter 11 bankruptcy is usually filed for by companies.

Bankruptcy Chapter 13:Chapter 13 bankruptcy is a type of bankruptcy proceeding outlined in the Bankruptcy Code. Chapter 13 is a financial reorganization procedure that applies to individual consumers and sole proprietorships.

When a financially distressed consumer or sole proprietor files for chapter 13 bankruptcy, the individual arranges to repay debt obligations with future income. Monthly payments are made to a court-appointed trustee until the debt is settled. This usually occurs over a period of 3 to 5 years.

Under chapter 13 bankruptcy, individuals and sole proprietors are allowed to keep property they may have lost by filing for Chapter 7 bankruptcy.

Bankruptcy Costs:
The more debt a company takes on, the more it risks being unable to meet its financial obligations to creditors. A highly leveraged firm is more vulnerable to a decrease in profitability. Therefore a highly levered firm has a higher risk of bankruptcy.

Bankruptcy costs vary for different types of firms, but they typically include legal fees, losses incurred from selling assets at distressed fire-sale prices, increased borrowing costs due to poorer credit, and the departure of valuable human capital. Bankruptcy costs can also affect intangible assets and include indirect costs. For example, bankruptcy could tarnish a company’s reputation and brand equity, causing it to lose market share and competitive positioning. It can also cause suppliers to tighten trade credit terms and cause the loss of customers.

The way to measure bankruptcy cost is to multiply the probability of bankruptcy by the expected cost of bankruptcy. A company should consider the expected cost of bankruptcy when deciding how much debt to take on.

Bankruptcy Courts:
In the U.S., all bankruptcies are filed in bankruptcy court. Bankruptcy Courts are subunits of U.S. District Courts. Every U.S. District Court has a bankruptcy court. Bankruptcy proceedings are determined by applicable federal and state laws.


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