Chap013 - Chapter 13 Outline I. Because of a myriad of...

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Chapter 13 Outline I. Because of a myriad of possible financial or business difficulties, a company may become insolvent, unable to pay its debts as they come due. A. To ensure the equitable treatment of all parties involved with an insolvent company (stockholders as well as creditors), laws have been written to provide structure for the bankruptcy process in the United States. B. At present, legal guidance is provided primarily by the Bankruptcy Reform Act of 1978 as amended. 1. This law attempts to arrive at a fair distribution of a debtor's assets. 2. It also seeks to discharge the obligations of an honest debtor. II. Bankruptcy proceedings can be formally instigated by either the debtor or a group of creditors. A. A voluntary petition is filed with the court by the insolvent company while an involuntary petition must be filed by a minimum number of creditors with, at least, a minimum level of debt. B. After a bankruptcy petition is received, normally the court will grant an order for relief to halt all actions against the debtor. III. Within the bankruptcy process, determining the appropriate classification of every creditor is an important step in achieving a fair settlement. A. Fully secured creditors hold a collateral interest in assets of the insolvent company having a value in excess of the related liability. B. Partially secured creditors also have a collateral interest but the expected net realizable value will not satisfy the entire obligation. C. Some unsecured obligations (including administrative expenses, certain debts to employees, and government claims for unpaid taxes) have priority over other unsecured debts. D. All remaining unsecured creditors will receive assets from the debtor only after all of the above claims have been satisfied. IV. A Statement of Financial Affairs is frequently produced by an insolvent company to disclose its current financial position. A. Assets are reported at net realizable value along with the disclosure of any pledged amounts. Liabilities are classified according to the security or priority of the creditor. B. A Statement of Financial Affairs is especially useful if prepared at the beginning of the bankruptcy process to assist all parties in evaluating the outcome of various actions. C. Most of the asset balances reported in this statement are merely estimations, projections of future events. V. Bankruptcy proceedings often conclude with the assets of the debtor being liquidated to satisfy creditor claims (a Chapter 7 bankruptcy). A. A trustee is appointed to oversee termination of business affairs, liquidation of noncash properties, and distribution of cash resources. B. The trustee prepares a periodic reporting of activities, frequently in the form of a Statement of Realization and Liquidation. 1.
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This note was uploaded on 09/13/2011 for the course AC 354 taught by Professor Worms during the Winter '11 term at Pennsylvania State University, University Park.

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Chap013 - Chapter 13 Outline I. Because of a myriad of...

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