How is a voluntary settlement resulting in

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Unformatted text preview: rence between technical insolvency and bankruptcy? What are the major causes of business failure? 17–13 Define an extension and a composition, and explain how they might be combined to form a voluntary settlement plan to sustain the firm. How is a voluntary settlement resulting in liquidation handled? LG6 17.5 Reorganization and Liquidation in Bankruptcy If a voluntary settlement for a failed firm cannot be agreed upon, the firm can be forced into bankruptcy by its creditors. As a result of bankruptcy proceedings, the firm may be either reorganized or liquidated. Bankruptcy Legislation Bankruptcy Reform Act of 1978 The governing bankruptcy legislation in the United States today. Chapter 7 The portion of the Bankruptcy Reform Act of 1978 that details the procedures to be followed when liquidating a failed firm. Bankruptcy in the legal sense occurs when the firm cannot pay its bills or when its liabilities exceed the fair market value of its assets. In either case, a firm may be declared legally bankrupt. However, creditors generally attempt to avoid forcing a firm into bankruptcy if it appears to have opportunities for future success. The governing bankruptcy legislation in the United States today is the Bankruptcy Reform Act of 1978, which significantly modified earlier bankruptcy legislation. This law contains eight odd-numbered chapters (1 through 15) and one even-numbered chapter (12). A number of these chapters would apply in the instance of failure; the two key ones are Chapters 7 and 11. Chapter 7 of the Bankruptcy Reform Act of 1978 details the procedures to be followed when liquidating a failed firm. This chapter typically comes into play once it has been determined that a fair, equitable, and feasible basis for the reorganization of a failed firm does not exist (although a firm may of its own accord choose not to 738 PART 6 Special Topics in Managerial Finance Chapter 11 The portion of the Bankruptcy Reform Act of 1978 that outlines the procedures for reorganizing a failed (or failing) firm, whether its petition is filed voluntarily or involuntarily. reorganize and may instead go directly into liquidation). Chapter 11 outlines the procedures for reorganizing a failed (or failing) firm, whether its petition is filed voluntarily or involuntarily. If a workable plan for reorganization cannot be developed, the firm will be liquidated under Chapter 7. Reorganization in Bankruptcy (Chapter 11) voluntary reorganization A petition filed by a failed firm on its own behalf for reorganizing its structure and paying its creditors. involuntary reorganization A petition initiated by an outside party, usually a creditor, for the reorganization and payment of creditors of a failed firm. There are two basic types of reorganization petitions—voluntary and involuntary. Any firm that is not a municipal or financial institution can file a petition for voluntary reorganization on its own behalf.11 Involuntary reorganization is initiated by an outside party, usually a creditor. An involun...
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This document was uploaded on 01/19/2014.

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