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Capital Structure > Understanding the Bankruptcy Process
Understanding the Bankruptcy Process
• What Happens in Bankruptcy
• Financial Management Before and During Bankruptcy
• Striking Agreements to Avoid Bankruptcy
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Capital Structure > Understanding the Bankruptcy Process
What Happens in Bankruptcy
• The bankruptcy system generally endeavors to reward creditors who continue to
extend financing to debtors and discourage creditors from accelerating their debt
collection efforts.
• In voluntary bankruptcy cases, debtors petition the bankruptcy court. In
involuntary bankruptcy cases, creditors file the petition.
• The automatic stay provision generally prohibits the commencement,
enforcement, or appeal of actions and judgments against a debtor for the
collection of a claim that arose prior to the filing of the bankruptcy petition.
• Under Chapter 7, a trustee collects the non-exempt property of the debtor, sells it,
and distributes the proceeds to the creditors.
Chapter 9 Bankruptcy
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• Chapters 9, 11, 12, and 13 allow the debtor to keep some or all of his or her
property and use future earnings to pay off creditors.
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Capital Structure > Understanding the Bankruptcy Process
Financial Management Before and During Bankruptcy
• Bankruptcy has the disadvantage of making it more difficult for an individual to
borrow in the future, and companies that are reorganized and not dissolved face
the risk of higher costs of capital for future operations.
• Before entering into bankruptcy, a company or individual can reduce debt
obligations and take actions to increase income and profitability.
• During the period of reorganization, a company must reduce debt and increase
profits in order to emerge from bankruptcy without losing control of operations.
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Capital Structure > Understanding the Bankruptcy Process
Striking Agreements to Avoid Bankruptcy
• Negotiation is a viable alternative if the debtor has sufficient income, or has
assets that can be liquidated so the proceeds can be applied against the debt.
• Debt restructuring is a process that allows a company or individual in financial
distress to reduce and renegotiate its delinquent debts in order to improve or
restore liquidity and continue its operations.
• Debt consolidation typically involves borrowing from one lender at a low rate of
interest in order to repay a number of higher interest rate obligations.
Too Much Credit
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Appendix
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Capital Structure
Key terms
• delinquent Late or failing to pay a debt or other financial obligation, like a mortgage or loan.
• financial distress a term used to indicate a condition when promises to creditors are broken or honored with difficulty.
• garnishment A judgment that a third party should pay money owed to a debtor directly to a creditor.
• insolvent Unable to pay one's bills as they fall due.
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Capital Structure
Chapter 9 Bankruptcy
Jefferson County, Alabama underwent Chapter 9 bankruptcy in 2009.
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Capital Structure
Too Much Credit
Debt consolidation is one option for individuals owing large sums on multiple credit cards.
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Capital Structure
An individual files for bankruptcy. Through this proceeding, the
debtor "reorganizes" his debt, is allowed to keep some of his
property, but must use some of his future earnings to pay off his
debts. What type of bankruptcy is this?
A) Chapter 13.
B) Chapter 7.
C) Chapter 9.
D) Chapter 11.
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Capital Structure
An individual files for bankruptcy. Through this proceeding, the
debtor "reorganizes" his debt, is allowed to keep some of his
property, but must use some of his future earnings to pay off his
debts. What type of bankruptcy is this?
A) Chapter 13.
B) Chapter 7.
C) Chapter 9.
D) Chapter 11.
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Capital Structure
A company is in dire financial straits. It has significant debts and
no steady income or property. What should it do?
A) Decrease the amount of the company's financial and operating
leverage.
B) Take no action.
C) Diversify the company's operations.
D) Dispose of the investments or operations that are not producing a
profit.
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Capital Structure
A company is in dire financial straits. It has significant debts and
no steady income or property. What should it do?
A) Decrease the amount of the company's financial and operating
leverage.
B) Take no action.
C) Diversify the company's operations.
D) Dispose of the investments or operations that are not producing a
profit.
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Capital Structure
When a company files Chapter 11 bankruptcy, which of the
following statements accurately describes an action the
company's management can take?
A) Unilaterally reject and cancel contracts based solely on what would be
best for the company.
B) Acquire financing and loans on favorable terms by giving the lenders
first priority on earnings.
C) Management can choose to continue to operate exactly as it did prior
to the bankruptcy.
D) All of these answers.
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Capital Structure
When a company files Chapter 11 bankruptcy, which of the
following statements accurately describes an action the
company's management can take?
A) Unilaterally reject and cancel contracts based solely on what would be
best for the company.
B) Acquire financing and loans on favorable terms by giving the lenders
first priority on earnings.
C) Management can choose to continue to operate exactly as it did prior
to the bankruptcy.
D) All of these answers.
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Capital Structure
A person borrows money from one lender at a low interest rate
and uses the funds to repay his higher interest rate debt
obligations. This is an example of _____.
A) a "workout"
B) debt restructuring
C) debt-for-equity swap
D) debt consolidation
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Capital Structure
A person borrows money from one lender at a low interest rate
and uses the funds to repay his higher interest rate debt
obligations. This is an example of _____.
A) a "workout"
B) debt restructuring
C) debt-for-equity swap
D) debt consolidation
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Capital Structure
Attribution
• Wikipedia. "Chapter 11, Title 11, United States Code." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Chapter_11,_Title_11,_United_States_Code
• Wikipedia. "Bankruptcy alternatives." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bankruptcy_alternatives
• Wikipedia. "Altman Z-score." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Altman_Z-score
• Wiktionary. "garnishment." CC BY-SA 3.0 http://en.wiktionary.org/wiki/garnishment
• Wikipedia. "Bankruptcy." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bankruptcy
• Wikipedia. "Bankruptcy in the United States." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bankruptcy_in_the_United_States
• Wikipedia. "Chapter 11, Title 11, United States Code." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Chapter_11,_Title_11,_United_States_Code
• Wikipedia. "Chapter 9, Title 11, United States Code." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Chapter_9,_Title_11,_United_States_Code
• Wiktionary. "insolvent." CC BY-SA 3.0 http://en.wiktionary.org/wiki/insolvent
• Wikipedia. "financial distress." CC BY-SA 3.0 http://en.wikipedia.org/wiki/financial%20distress
• Wikipedia. "Bankruptcy alternatives." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bankruptcy_alternatives
• Wiktionary. "delinquent." CC BY-SA 3.0 http://en.wiktionary.org/wiki/delinquent
• Wikipedia. "Debt restructuring." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Debt_restructuring
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