Law for Business

Mr. Bernstein

Notes, pp 624-626What is Bankruptcy?

January 13, 2015

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Law for BusinessMr. Bernstein

Importance of Bankruptcy Laws Sound Bankruptcy Laws promote risk-taking in an

economic system by clarifying potential outcomesBusiness owners have a path to a restartCreditors understand the process for distributing

remaining assets of a failed businessThe US Constitution specifically grants Congress

exclusive power to establish Bankruptcy Laws

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Law for BusinessMr. Bernstein

Bankruptcy Laws Chapter 7: Liquidation

Personal or BusinessTrustee liquidates all assets and distributes them amongst claimsStates can establish relatively minor exemptionsSome claims cannot be discharged: taxes, alimony, child support, judgments for intentional torts, student loans Cannot declare Chapter 7 Bankruptcy twice within 6 years

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Law for BusinessMr. Bernstein

Bankruptcy Laws Chapter 11: Reorganization

Used primarily by corporationsLitigation and debt collection against business is placed on holdPlan is created for dispensing some obligations and redistributing remaining assets, often with the business entity continuing operations with a prospect of profitability going forwardPlan is voted on by various creditors

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Law for BusinessMr. Bernstein

Bankruptcy Laws Chapter 11: Reorganization

Allows continuation of operations while a restructuring of finances is designed and implemented.Provides an orderly process which gives potential lenders or investors greater comfort to work with higher-risk businesses.Allows restructuring of businesses in a way which is less disruptive to employees and other stakeholders.

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Law for BusinessMr. Bernstein

Rationale for Bankruptcy Chapter 11$$ Value of a business reorganized into a going concern

>$$ Value of sum of parts liquidated individually

Some goodwill may exist in business franchise even if it cannot pay its bills

More value is therefore available to pay creditors