bankruptcy and reorganization

You then need to watch a YouTube video presentation on your chosen topic and then post the presentation summary in the dialog box. Your summary must consist of at least one paragraph of reasonable length (7-9 sentences). Your post must include the following (in this order):

1, Title (Chapter # and topic)

2. Summary of the presentation

3. Link to the video

You may, at your discretion, watch multiple videos on your chosen topic. In that case, you must provide the links to all the videos.

Topic that I chose: Bankruptcy and reorganization

When a business becomes insolvent, it doesn’t have enough cash to meet its interest and principal payments. A decision must then be made whether to dissolve the firm through liquidation, or to permit it to reorganize and thus continue to operate. These issues are addressed in Chapter 7 and Chapter 11 of the federal bankruptcy statutes, and the final decision is made by a federal bankruptcy court judge.

The decision to force a firm to liquidate versus permitting it to reorganize depends on whether the value of the reorganized business is likely to be greater than the value of its assets if they were sold off piecemeal. In a reorganization, the firm’s creditors negotiate with management on the terms of a potential reorganization. The reorganization plan may call for restructuring the debt, in which case the interest rate may be reduced; the term to maturity, lengthened; or some of the debt may be exchanged for equity. The point of the restructuring is to reduce the financial charges to a level that is supportable by the firm’s projected cash flows. Of course, the common stockholders also have to “take a haircut”—they generally see their position diluted as a result of additional shares being given to debtholders in exchange for accepting a reduced amount of debt principal and interest. A trustee may be appointed by the court to oversee the reorganization, but the existing management generally is allowed to retain control.

Liquidation occurs if the company is deemed to be worth more “dead” than “alive.” If the bankruptcy court orders a liquidation, assets are auctioned off and the cash obtained is distributed as specified in Chapter 7 of the Bankruptcy Act. Web Appendix 7C provides an illustration of how a firm’s assets are distributed after liquidation. For now, this is what you need to know: (1) The federal bankruptcy statutes govern reorganization and liquidation. (2) Bankruptcies occur frequently. (3) A priority of the specified claims must be followed when the assets of a liquidated firm are distributed. (4) Bondholders’ treatment depends on the terms of the bond. (5) Stockholders generally receive little in reorganizations and nothing in liquidations because the assets are usually worth less than the amount of debt outstanding.

 

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