H4 FICPA bankruptcy today what every cpa should know 10-10

Bankruptcy Today

What Every CPA Should Know

Bill Maloney

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Bankruptcy TodayWhat Every CPA Should Know

This session is intended to enable you to havean understanding of the Bankruptcy process

When your client or a customer or vendor tell you “ We’re thinking about filing bankruptcy”.

You can provide advice to client or your company

Session Objective

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• General background and history• Current statistics • Bankruptcy process• Help clients determine when to file• Assist clients in preparing for bankruptcy• Recordkeeping requirements during bankruptcy• US Trustee reporting requirements• Fresh start accounting• Liability protection for CPA

Session Objective

Year Totals Filings

Business Filings

Non-Business Filings

Consumer Filings as a Percentage of Total Filings

1980 331,264 43,694 287,570 86.81%

1981 363,943 48,125 315,818 86.78%

1982 380,251 69,300 310,951 81.78%

1983 348,880 62,436 286,444 82.10%

1984 348,521 64,004 284,517 81.64%

1985 412,510 71,277 341,233 82.72%

1986 530,438 81,235 449,203 84.69%

1987 577,999 82,446 495,553 85.74%

1988 613,465 63,853 549,612 89.59%

1989 679,461 63,235 616,226 90.69%

1990 782,960 64,853 718,107 91.72%

1991 943,987 71,549 872,438 92.42%

1992 971,517 70,643 900,874 92.73%

1993 875,202 62,304 812,898 92.88%

1994 832,829 52,374 780,455 93.71%

1995 926,601 51,959 874,642 94.39%

1996 1,178,555 53,549 1,125,006 95.46%

1997 1,404,145 54,027 1,350,118 96.15%

1998 1,442,549 44,367 1,398,182 96.92%

1999 1,319,465 37,884 1,281,581 97.12%

2000 1,253,444 35,472 1,217,972 97.17%

2001 1,492,129 40,099 1,452,030 97.31%

2002 1,577,651 38,540 1,539,111 97.56%

2003 1,660,245 35,037 1,625,208 97.89%

2004 1,597,462 34,317 1,563,145 97.85%

2005 2,078,415 39,201 2,039,214 98.11%

2006 617,660 19,695 597,965 96.81%

2007 850,912 28,322 822,590 96.67%

2008 1,117,771 43,546 1,074,225 96.10%

2009 1,473,675 60,837 1,412,838 95.87%

Bankruptcy Filings 1980-2009

2009- 1,473,675

95% consumers

Businesses 60,837

12 of last 29 years were higher

1Qtr 2010 388,148 total

Business 14,607

Ch 11- 3,293Ch 7 – 10,074

2007 33% Ch112009 25% Ch 112010 20% Ch 11

Company Bankruptcy

Date Total Assets

Pre-Bankruptcy

Lehman Brothers Holdings 09/15/08 $691,000,000,000

Washington Mutual 09/26/08 $327,900,000,000

Worldcom, Inc. 07/21/02 $103,914,000,000

General Motors 6/1/09 $91,000,000,000

Enron Corp.* 12/2/01 $63,392,000,000

Conseco, Inc. 12/18/02 $61,392,000,000

Chrysler 04/30/09 $39,000,000,000

Thornburg Mortgage 05/01/09 $36,500,000,000

Pacific Gas and Electric 04/06/01 $36,000,000,000

Texaco, Inc. 4/12/1987 $35,892,000,000

Financial Corp. of America 9/9/1988 $33,864,000,000

Global Crossing Ltd. 1/28/2002 $30,185,000,000

UAL Corp. 12/9/2002 $25,197,000,000

Adelphia Communications 6/25/2002 $21,499,000,000

MCorp 3/31/1989 $20,228,000,000

Mirant Corporation 7/14/2003 $19,415,000,000

First Executive Corp. 5/13/1991 $15,193,000,000

Gibraltar Financial Corp. 2/8/1990 $15,011,000,000

Kmart Corp. 1/22/2002 $14,600,000,000

FINOVA Group, Inc., (The) 3/7/2001 $14,050,000,000

HomeFed Corp. 10/22/1992 $13,885,000,000

Southeast Banking Corporation 9/20/1991 $13,390,000,000

NTL, Inc. 5/8/2002 $13,003,000,000

Reliance Group Holdings, Inc. 6/12/2001 $12,598,000,000

Imperial Corp. of America 2/28/1990 $12,263,000,000

Federal-Mogul Corp. 10/1/2001 $10,150,000,000

First City Bancorp.of Texas 10/31/1992 $9,943,000,000

First Capital Holdings 5/30/1991 $9,675,000,000

Baldwin-United 9/26/1983 $9,383,000,000 SF1:0.7.10.100526.9148

20 largest Bankruptcy Cases

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• In medieval Italy, when a businessman did not pay his debts,

(women were not allowed to own property) it was the practice to destroy his trading bench. From Italian for broken bench, "banca rotta," comes the term bankruptcy.

• Creditors ruled, no pay …..prison or death….Henry VIII first legislation in 1542 in England. Many debtors fled to U.S.

• 1938 first US bankruptcy law. 1978 first comprehensive Bankruptcy act, gave courts broad power. Supreme court ruled bankruptcy judges had too much power. Current code was modified in 2006

• Current legislative focus is to allow a debtor to restructure

debts and permit the rehabilitation of a company to continue


History

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If you can’t pay....don’t buy!!!


In Medieval Italy

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Different Types of Filings - Business

Chapter 11 - Reorganization

Chapter 7 - Liquidation

Chapter 12 – Farmer or Fisherman

Chapter 9 - Municipality

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Court Structure

•Federal Court NOT State Court

•Bankruptcy Judge Federal Judge, type I, 14 year term

•Jurisdiction of District Court

•11th Circuit court of Appeals

•Florida 3 districts, Southern, Middle, Northern

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Bankruptcy Process

• Petition Date – date the bankruptcy petition was filed

• Automatic Stay – stops creditors

• First day motions

• Cash collateral

• Focus is on confirming a plan of reorganization

• Creditors vote on plan of reorganization

• Chapter 11 can also be used for liquidation/sale

• Debtor-in-possession status – D.I.P.

• Voluntary – Involuntary -3 creditors owed $12k -risky

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Bankruptcy Process

CARDINAL RULE

• Debtor cannot pay any pre-petition debt unless specifically authorized by court

• Bankruptcy court can claw back

• Debtor can generally pay post-petition debts if they are ordinary course of business

• Retention of Professionals - Must be approved by Bankruptcy Court BEFORE beginning work! If not retained, cannot be paid! THAT MEANS YOU !!!!!

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Bankruptcy Process

• Benefit of CH 11 – breathing room

• Automatic stay freezes all actions against debtor, no pre-petition debt can be paid

• Opportunity for Lien Stripping - Reduce and restructure payment on secured debt

• Unsecured debts are generally paid pennies on the dollar

• Can pay off approved claims up to 6 years-including IRS and Sales Tax

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Bankruptcy Process

• Bankruptcy has limited benefit if it is filed too late

• File before significant default or termination

• Leases/Franchise Agreements - Once they are properly terminated, bankruptcy cannot bring them back

• Goods delivered to debtor within 20 days of filing bankruptcy entitled to administrative expense priority !!

• No requirement to make a reclamation demand for this claim. Still required to file motion with court !!

• Vendors may reclaim goods delivered to debtor within 45 days preceding filing !!

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Bankruptcy Process•Critical Vendor status !!•Committee of unsecured creditors appointed by U.S. Trustee. Estate pays for Committee’s professionalsCommittee is watchdog and can exert influence over case

•Preferences - Preferring one creditor over another. Ensures pro rata distribution to unsecured creditors. Debtor can recover payments made to creditors during 90 days before petition !! Watch out for security interest granted on old debt. New value exception !!

•Fraudulent transfers – 2 year look back, 4 years for insiders. Company must have been insolvent, received less than fair value !!

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U.S. Trustee

• Responsible to watch out for unsecured creditors

and follow guidelines, has voice in all motions, fees

• Special reporting monthly, not your normal financial statements, cash basis, court forms, public record

• Stub period reporting pre and post records, usually a glitch

• Assessed filing fees $30,000 per Qtr based on cash disbursements

• Can request forensic and/or trustee

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When To File

•Liquidity crisis, before you hit the wall•Ward off foreclosure, default•When you know it’s hopeless, need to restructure

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Preparing For Bankruptcy

•D&O insurance•Hoard cash•Hire professionals, pay retainers•Make sure you have a good Accounts Payable list, all former vendors and employees, and addresses

•Don’t allow cancellation of leases or franchise agreements•Preference payments•Insolvency•Retention of key employees (KERP)•Communication•Leadership

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Recordkeeping Requirements

•Books as usual•US Trustee requirements, follow court approved forms, cash based just like a check register•SOFA, and schedules – list all assets liabilities, contracts, leases, payroll master (may want to seal or special request no names)•Insurance policies

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Managing Professional’s Liability

•Consult legal counsel•Make sure you get a retainer•Pre-petition debt owed to you•Engagement letter•Conflicts affidavit•Application to employ with court – Before you do work •Make sure everything you do is approved by court•Disgorgement•Time record keeping 6 minute increments•Professional standards same in bankruptcy•Gross negligence and willful misconduct

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Bankruptcy - How To Get Out

•Debtor has exclusivity to file a plan for 120 daysPlan filed, creditors get to vote, 50% creditors AND 2/3 money confirms the plan.

• Most bankruptcies last 9mo to year ½ unless a pre-pak•Meet confirmation standard – Feasible and no CH 22•Absolute priority rule

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• Taxes are very complex. Debt forgiveness becomes taxable income.

• Valuation of surviving entity becomes the basis of the new entity

• Accounting guided by:– SOP 90-7– SAB 5-J– SFAS 15– EITF 96-19– (codified by FASB 168 )

Accounting and Taxes


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• Bankruptcy in a nutshell- Amazon• Bankruptcydata.com• Westlaw• American Bankruptcy Institute• Pacer system• U.S.Court web site

Helpful Resources


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Bill Maloney

E-mail:[email protected]


Documents

H4 FICPA bankruptcy today what every cpa should know 10-10