Unformatted text preview: Unsecured claims can be divided into two categories: priority and nonpriority. Unsecured creditors whose claims have priority must be paid in full before nonpriority unsecured creditors get anything. Employees of a business, for example, have earned wages, vacation time, and pensions all on a promise to pay, and they hold no security interest in anything. Their claims are among the nine types of priority claims, and these claims must be paid in order; each type is paid in full before the next type. Other priority claims include 35
those for alimony, child support, and taxes. Liquidation Illustration Data (millions of $)
Accounts payable $10.0 Notes payable 5.0 Accrued wages 0.3 Federal taxes 0.5 State and local taxes 0.2 First mortgage 3.0 Second mortgage 0.5 Subordinated debentures (Junior Bond)* 4.0
$23.5 Subordinated to notes payable. 3
(More…) 6 Proceeds from Liquidation From current assets $14.0 From fixed assets* 2.5 Total receipts $16.5 *All fixed assets pledged as collateral to mortgage holders. 37 Priority Distribution (millions of $)
Accrued wages Claim Distribution Unsatisfied $0.3 $0.3 $0.0 Federal taxes 0.5 0.5 0.0 Other taxes 0.2 0.2 0.0 First mortgage 3.0 2.5 0.5 0.5 0.0 0.5 $4.5 $3.5 $1.0 Second mortgage Notes: (1) First mortgage receives entire proceeds from sale of fixed assets, leaving $0 for the second mortgage. (2) $16.5 $3.5 = $13.0 remains for 38 General Creditor Distribution (millions of $)
Accounts payable Remaining GC Claim
$10.0 Initial Distr. a Final % Recd. $6.500 Amt.b
$6.500 3.250 5.000 100.0 65.0% Notes payable 5.0 Accrued wages 0.0 0.300 100.0 Federal taxes 0.0 0.500 100.0 Other taxes 0.0 0.200 100.0 First mortgage 0.5 0.325 2.825 94.2 Second mortgage 0.5 0.325 0.325 65.0 Sub. debentures 4.0 2.600 0.850 21.2 $20.0 $13.000 $16.500 a Pro rata amount = $13/$20 = 0.65.
b Includes priority distribution and $1.75 transfer from subordinated debentures. 39 Some Criticisms of Bankruptcy Laws Critics contend that current bankruptcy laws are flawed.
Too much value is siphoned off by lawyers, managers, and trustees. Companies that have no hope remain alive too long, leaving little for creditors when liquidation does occur.
Companies in bankruptcy can hurt other companies in industry. 40 Recent Bankruptcy Law Changes The 2005 changes to the bankruptcy laws: Limited to 18 months the time management can file a reorganization plan After the 18 months creditors can propose a plan if an acceptable plan hasn’t been proposed by management 41 What is MDA, and how can it be used to predict bankruptcy? Multiple discriminant analysis (MDA) is a statistical technique similar to multiple regression. It identifies the characteristics of firms that went bankrupt in the past. Then, data from any firm can be entered into the model to assess the...
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- Winter '12
- Bankruptcy, Financial distress