BANKRUPTCYKen BakondiKara Brausen

Bankruptcy

Defined History Statistics Chapter 11 Chapter 7 Questions?

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

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

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)

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

Bankruptcy Statistics

Bankruptcy Statistics

Total U.S. Business Filings

Bankruptcy Statistics

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

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

General Motors, Corp.

http://finance.yahoo.com/q/bs?s=GM&annual

CHAPTER 11: REORGANIZATION

“intensive care”

Chapter 11: Key Process Features Voluntary petition Involuntary petition Automatic stay Exclusivity period Debtor-in-Possession financing Absolute priority rule

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

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

Holdout Problem

When one or more of the creditors refuse to agree to reorganization terms because of the potential for larger individual recovery.

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

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

Chapter 11 – Success/Failure

CHAPTER 7: LIQUIDATION

“death”

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

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

Chapter 7: Liquidation

Distribution of assets based on absolute priority rule

1) Administrative Costs

2) Wages/Unpaid Employee Benefits

3) Consumer Claims

4) Taxes

Chapter 7: Liquidation

5) Secured Creditors

6) Unfunded Pension Liability

7) Unsecured Creditors

8) Preferred Stockholders

9) Common Stockholders

Questions?