bankruptcy

Examples of bankruptcy in the following topics:

• What Happens in Bankruptcy

  • In voluntary bankruptcy cases, which account for the overwhelming majority filed, debtors petition the bankruptcy court.
  • Commencement of a bankruptcy case creates an estate.
  • The United States District Courts have jurisdiction over bankruptcy matters; however, each district court may "refer" bankruptcy matters to the Bankruptcy Court.
  • The Bankruptcy Code imposes an automatic stay at the moment a bankruptcy petition is filed.
  • The Bankruptcy Code accomplishes this objective through the use of a bankruptcy plan.

• Bankruptcy Considerations

  • In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor.
  • Generally, a debtor declares bankruptcy to obtain relief from debt.
  • Usually, when a debtor files a voluntary petition, his or her bankruptcy case commences.
  • It is also known as straight bankruptcy.
  • Chapter 7 is the simplest and quickest form of bankruptcy available.

• Financial Management Before and During Bankruptcy

  • To avoid the negative impacts of bankruptcy, individuals and companies in financial distress have a number of bankruptcy alternatives.
  • A company may reference the Altman Z-score formula in order to determine the likelihood that it will be forced into bankruptcy.
  • The formula may be used to predict the probability that a firm will go into bankruptcy within two years.
  • For the option of financial management during bankruptcy to exist, a form of bankruptcy allowing reorganization, such as chapter 11, must be used.
  • If the company's debts exceed its assets, the bankruptcy can result in the company's owners being left with nothing.

• Bankruptcy and Bond Value

  • There is no guarantee of how much money will remain to repay bondholders in a bankruptcy, therefore, the value of the bond is uncertain.
  • When a business is unable to service its debt or pay its creditors, the business or its creditors can file with a federal bankruptcy court for protection under either Chapter 7 or Chapter 11 of the Bankruptcy code.
  • As an example, after an accounting scandal and a chapter 11 bankruptcy at the giant telecommunications company Worldcom in 2004, its bondholders ended up being paid 35.7 cents on the dollar.
  • In a bankruptcy involving reorganization or recapitalization, as opposed to liquidation, bondholders may end up having the value of their bonds reduced, often through an exchange for a smaller number of newly-issued bonds.
  • Bankruptcy Court for the Northern District of Florida.

• Striking Agreements to Avoid Bankruptcy

  • Most creditors are willing to negotiate a settlement to receive a portion of their money and not risk losing everything in a bankruptcy.
  • In general, creditors understand that bankruptcy is an option for debtors with excessive debt.
  • Therefore, most creditors are willing to negotiate a settlement so that they receive a portion of their money, instead of risking losing everything in a bankruptcy.
  • A debt restructuring is usually less expensive than bankruptcy.

• Claim to Income

  • In the cases of bankruptcy and dividend distribution, preferred stock shareholders will receive assets before common stock shareholders.
  • In the event of bankruptcy, common stock investors receive any remaining funds after bondholders, creditors (including employees), and preferred stock holders are paid.
  • As such, these investors often receive nothing after a bankruptcy.

• Trade-Off Consideration

  • It states that there is an advantage to financing with debt—the tax benefits of debt, and there is a cost of financing with debt—the cost of financial distress including bankruptcy.
  • The reason they do not is because of the risk of bankruptcy and the volatility that can be found in credit markets—especially when a firm tries to take on too much debt.

• Impacts of Financial Leverage

  • Due to financial leverage's effect on solvency, a company that borrows too much money might face bankruptcy during a business downturn, while a less-levered company may avoid bankruptcy due to higher liquidity.

• Comparing Common Stock, Preferred Stock, and Debt

  • However, both common and preferred stock fall behind debt holders when it comes to claims to assets of a business entity should bankruptcy occur.
  • Common shareholders often do not receive any assets after bankruptcy as a result of this principle.

• Default Risk

  • As an example, after an accounting scandal and a Chapter 11 bankruptcy at the giant telecommunications company Worldcom, in 2004 its bondholders ended up being paid 35.7 cents on the dollar.
  • In a bankruptcy involving reorganization or recapitalization, as opposed to liquidation, bondholders may end up having the value of their bonds reduced, often through an exchange for a smaller number of newly issued bonds.