Posts Tagged ‘bankruptcy’

Chapter 7? Chapter 11? What kind of book is this?

Friday, June 3rd, 2011

Lately, the economy’s troubles have people talking about Chapter 7 and Chapter 11 so often that you might think they’re part of a new bestseller. In fact, Chapter 7 and Chapter 11 are two different chapters of the U.S. Bankruptcy code. They explain two different ways you can file for bankruptcy.

If a company files for bankruptcy under Chapter 11 – “rehabilitation bankruptcy” – it tries to make some changes and then get running again. Basically, the company can’t ignore the money it owes creditors, but it can do things like negotiate a lower interest rate, making it easier to try to pay the money back. If it’s successful in Chapter 11, the company can keep working like usual.

But if there’s is no hope for a company to fix itself, it files for bankruptcy under Chapter 7 – “liquidation bankruptcy” – and the entire company is, well, liquidated, meaning that it is broken up into pieces and sold. A company that files for Chapter 7  is in such bad shape that they can’t do anything but sell their assets. The people who lent the bank money then wait in line to collect debts, based on when they loaned their money to the company in the first place.

From the business owner’s point of view, bankruptcy is a kind of chapter in a scary novel. (But hopefully not the final chapter.)

BP’s Forecast: Cloudy At Best

Tuesday, June 8th, 2010

Bankers, lawyers, and Wall Street are all anticipating the oil superpower’s next move. The consensus? Bankruptcy.

  • Between the rapidly declining value of BP shares, the cleanup costs, and the anticipated lawsuits from gulf fisherman and tourism companies, it seems likely that BP is being primed for a takeover.
  • Who’s interested? Both Shell and Exxon have the means to buy BP, and bankers believe now is the time to strike. Only problem is how to separate the deal from all the legal exposure.
  • BP’s chief executive, Tony Hayward, insists that BP will foot the whole bill.
  • According to the Oil Pollution Act of 1990, BP’s financial responsibility for the cleanup is capped at $75 million. But if it’s determined that safety regulations were violated (which is very likely), the cap is no longer relevant.

Facts & Figures

  • BP has lost more than a third of its value since the Deepwater Horizon catastrophe.
  • BP generated nearly $17 billion of profit last year.
  • One estimate of the BP cleanup bill is more than $40 billion.
  • If a court rules against the company, the cost of the spill could skyrocket into the hundreds of billions, almost guaranteeing the end of  BP.

Best Quote

“The strength of cash-flow generation in recent quarters has provided us with a balance sheet that allows us to fully take on the responsibility for the Gulf of Mexico response.” – Tony Hayward, Chief Executive of BP

What happens to your money if your bank disappears?

Thursday, November 19th, 2009

Don’t worry, just because your bank has evaporated doesn’t mean your money will too – no screaming necessary. Every major bank in the country is insured by the Federal Deposit Insurance Corporation (FDIC); it’s the government organization in charge of protecting your deposits (up to a certain amount) and keeping the banking system running smoothly. But what happens when a bank outright fails?

Although rare, when a bank does fail the FDIC can step in one of two ways. The preferred method is where the FDIC will try to find a healthy bank to buy the failing bank’s assets, which would mean your funds are transferred over to the better bank. Without you doing anything, your money is automatically put in a safer place. On the other hand, if a buyer can’t be found, the FDIC will write you a check for your money.

How quickly and for how much? The FDIC insures your money up to $250,000 per account and typically sends checks out within a few days of the bank failing. Since the FDIC’s creation, no one has ever lost a single penny of insured funds – a pretty good record for a 76-year-old organization. Either with a new bank or in a hefty check, you can breathe easy knowing you’ll get your money back.

Nonprofits In Debt? Businesses Aren’t The Only Ones Going Bankrupt

Thursday, September 24th, 2009

While nonprofits are somewhat restricted when it comes to investing, they can basically act like any hedge fund or corporation. In the past, this leeway allowed nonprofits to grow their assets enormously, but right now it’s causing them some financial headaches.

  • For a while now, nonprofits have been actively making risky investment decisions and racking up debt. This high-risk, high-return investing style allowed many colleges, museums, and nonprofits to expand rapidly.
  • A large portion of the debt is from tax-exempt bonds that nonprofits were allowed to issue – cheap debt, with potentially high returns. After the financial crisis, nonprofits’ assets plummeted in value, yet they still had huge debt obligations.
  • Without an increase in revenues (through donations or property sales), many charities are going to end up bankrupt!

Facts & Figures

  • According to the IRS, the value of tax-exempt bonds issued by nonprofits rose from $98 billion in 1993 to $311 billion in 2006.
  • Brandeis University has $208 million in tax-exempt bond debt and is selling its art collection to pay for it.
  • Copia, a culinary institution in California, went bankrupt because of $78 million in bond debt.

Best Quote

“[O]ver the next several years nonprofits across the country will have to renegotiate bond covenants, reduce services, cut staff or actually default and face foreclosures, repossessions, and in some cases, even bankruptcy.” – Norman I. Silber, Law Professor at Hofstra University

Bankruptcy is…

Thursday, August 20th, 2009

Bankruptcy is a legal procedure which occurs when a company in debt is unable to make the payments it owes and therefore the assets of the company are distributed to the creditors. Filing for bankruptcy can be either voluntary or involuntary but is an indicator that a company cannot raise enough money to repay the debt without selling its assets.

Individuals can also file for bankruptcy for basically the same reason: they have more debt than they can reasonably repay. When you file for bankruptcy, your debts are either forgiven or reorganized into a viable payment plan. A declaration of personal bankruptcy will remain on your credit record for seven to ten years.

What happens if you don’t pay back a loan?

Monday, August 10th, 2009

Normally, people who can’t pay their loans declare bankruptcy, which is basically an acknowledgment that you are incapable of recovering from your debt. If you’re really in over your head, sometimes bankruptcy can be the only option, but it’s generally a last resort – your debts are forgiven, but your credit score takes a massive hit. And with a low credit score, it’ll be a lot harder for you to get loans in the future.

But suppose you don’t declare bankruptcy and just soldier on without repaying what you owe. What happens then? At first, you probably just continue “rolling-over” the loan and paying more and more interest on the item you purchased.  If you took out a loan for a tangible item, the lender usually comes to repossess it. For example, if you’ve leased a car and you stop paying the lease, the company that loaned you the car will just take it back.

But if there’s no way for the lender to repossess the loan (if the loan was money, for example), the company has to take the matter to court. The lender can decide either to sue you (which basically forces you to either pay back the loan, declare bankruptcy, or be convicted in court), or to garnish your wages, which means that a judge decides to award a certain percentage of your paycheck to your creditor until the loan is repaid.

Once you get into serious debt, it’s very difficult to get out unscathed, so it’s better to avoid that decline altogether; you’ll just get forced into one of the above positions, and all of them have unpleasant consequences.

Fiat Rescues Chrysler Just In Time

Tuesday, June 30th, 2009
About to collapse in the heat of the recession, American car giant Chrysler is picked up by Italian automaker Fiat.
  • The U.S. government brokered a deal between Italian automaker Fiat and the recently bankrupt Chrysler; Fiat’s CEO Sergio Marchionne will become the CEO of the newly formed Chrysler Group LLC .
  • It may take up to two years for Chrysler to unveil smaller cars, which are a key ingredient to Fiat’s success in Europe.
  • Although Chrysler has sold its assets to the newly formed Chrysler Group LLC, it will most likely stay in bankruptcy for quite some time.

Facts & Figures

  • Fiat will initially inherit a 20% stake in Chrysler, but has the potential to increase its stake to 35% should it meet certain fuel-efficiency goals.
  • The new Chrysler will be owned by many different groups: 55% will be owned by the United Auto Workers union, 8% by the U.S. government, and 2% by the Canadian government.
  • If Fiat is able to repay the $22.1 billion Chrysler was lent from the U.S. Treasury Department, it will be allowed to take a majority stake in Chrysler.

Best Quote

“This is by no means the end of Chrysler’s bankruptcy case. So many issues still need to be resolved, which may take months or even years.” – Ed Neiger, Founder of Neiger LLP (a creditors’ rights and bankruptcy law firm)