Web Appendix 7B - 19819_07Bw_p1-7.qxd 1/19/06 10:32 AM Page...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
7B-1 In the event of bankruptcy, debtholders have a prior claim to a firm’s income and assets over the claims of both common and preferred stockholders. Further, different classes of debtholders are treated differently in the event of bankruptcy. Because bankruptcy is a fairly common occurrence, and because it affects the bankrupt firm and its customers, suppliers, and creditors, it is important to know who gets what if a firm fails. These topics are discussed in this appendix. 2 Federal Bankruptcy Laws Bankruptcy actually begins when a firm is unable to meet scheduled payments on its debt or when the firm’s cash flow projections indicate that it will soon be unable to meet pay- ments. As the bankruptcy proceedings go forward, the following central issues arise: 1. Does the firm’s inability to meet scheduled payments result from a temporary cash flow problem, or does it represent a permanent problem caused by asset values hav- ing fallen below debt obligations? 2. If the problem is a temporary one, then an agreement that stretches out payments may be worked out to give the firm time to recover and to satisfy everyone. However, if basic long-run asset values have truly declined, economic losses will have occurred. In this event, who should bear the losses? 3. Is the company “worth more dead than alive”—that is, would the business be more valuable if it were maintained and continued in operation or if it were liquidated and sold off in pieces? 4. Who should control the firm while it is being liquidated or rehabilitated? Should the existing management be left in control, or should a trustee be placed in charge of operations? These are the primary issues that are addressed in the federal bankruptcy statutes. Our bankruptcy laws were first enacted in 1898, modified substantially in 1938, changed again in 1978, and overhauled again in 2005. 3 The 1978 Act, which provides the basic laws that govern bankruptcy today, was a major revision designed to streamline and expedite proceedings, and it consists of eight odd-numbered chapters, the even-numbered chapters of the earlier Act having been deleted. Chapters 1, 3, and 5 of the 1978 Act contain general provisions applicable to the other chapters; Chapter 7 details the proce- dures to be followed when liquidating a firm; Chapter 9 deals with financially distressed municipalities; Chapter 11 is the business reorganization chapter; Chapter 13 covers the adjustment of debts for “individuals with regular income”; and Chapter 15 sets up a system of trustees who help administer proceedings under the Act. WEB APPENDIX WEB APPENDIX 7B Bankruptcy and Reorganization 1 1 This Web Appendix was coauthored by Arthur L. Herrmann of the University of Hartford. 2
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 7

Web Appendix 7B - 19819_07Bw_p1-7.qxd 1/19/06 10:32 AM Page...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online