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Director’s Desk:
On Benefits and Bankruptcies

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The Bacon’s Benefit

We’re always searching for member benefits for our Association and have contracted recently for one with Bacon’s Publicity Checker. PMA is acting as the parent company for this service and PMA members can participate using a special e-mail address set up for them. There is a fee for this service, which we are currently developing. Please read about all the services that Bacon’s provides by going to page XX in this Newsletter, and then check our website in the Member Benefits area to determine the cost involved in this new and exciting program for PMA members.

Each month, we will be featuring a new or updated member benefit at our site, so visit it and check out all the programs offered with your membership.

 

A Brief Overview of Bankruptcy

 

I was hoping to find someone to develop an article about the differences among bankruptcies governed by Chapters 7, 11, and 13 since, as of this writing, BookPeople, a well-respected warehouse distribution company, has just filed under Chapter 11. Because nobody I spoke with was well versed in bankruptcy law, I thought it best to offer a brief description of each type of bankruptcy filing in the U.S.

Many websites provide lots of information on the differences among the types of bankruptcy filings, but the easiest to understand is at http://www.legal-database.com.

Basically, this site describes the overall picture as follows:

Bankruptcy law provides for several different types of bankruptcy, calU?üchapters because the various provisions that govern them are contained in different chapters of the Bankruptcy Code.

 

Chapter 11 Bankruptcy

Chapter 11 reorganization proceedings are typically for corporations or partnerships. In Chapter 11, the debtor usually remains in possession of its assets and continues to operate any business, subject to the oversight of the court and the creditors’ committee.

 

Chapter 13 Bankruptcy

Chapter 13 is quite different. According to this website, Chapter 13 is a repayment plan for individuals with regular income and unsecured debt less than $290,525 and secured debt less than $871,550. The debtor keeps its property and makes regular payments to a trustee out of future income over about a three-to-five year period. Repayment in Chapter 13 generally ranges from 10% percent to 100%, depending on the debtor’s income and the type of debt.

 

Chapter 7 Bankruptcy

Chapter 7 is the most common form of bankruptcy. It is a liquidation proceeding in which the debtor’s non-exempt assets are sold by a trustee and the proceeds are distributed to creditors according to the priorities established in the Code. Wages the debtor earns after the case is begun are the debtor’s, beyond the reach of creditors who had claims on the date of filing.

 

The law provides a process for struggling companies–a way to restructure (Chapter 11)–which is what BookPeople chose. Many companies within the PMA membership have been able to work their way out of this type of bankruptcy filing and become solid operating companies again. Every company executive I’ve spoken with wishes there was a way to avoid this type of filing, and holds off as long as possible before taking this step.

Another good website providing information on bankruptcy filing is http://www.sec.gov/investor/pubs/bankrupt.htm, which puts the information in a question and answer format.

For instance:

What happens when a public company files for protection under the federal bankruptcy laws?

 

Federal bankruptcy laws govern how companies go out of business or recover from crippling debt. A bankrupt company, the “debtor,” might use Chapter 11 of the Bankruptcy Code to “reorganize” its business and try to become profitable again. Management continues to run the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court.

Under Chapter 7, the company stops all operations and goes completely out of business. A trustee is appointed to “liquidate” (sell) the company’s assets and the money is used to pay off the debt, which may include debts to creditors and investors.

The investors who take the least risk are paid first. For example, secured creditors take less risk because the credit that they extend is usually backed by collateral, such as a mortgage or other assets of the company. They know they will get paid first if the company declares bankruptcy.

 

How Are Assets Divided in Bankruptcy?

Secured Creditors

— often a bank — are paid first.

Unsecured Creditors

— such as banks, suppliers, and bondholders — have the next claim.

Stockholders

— owners of the company — have the last claim on assets and may not receive anything if the Secured and Unsecured Creditors’ claims are not fully repaid.

 

Both of the sites mentioned above provide lots more information on all the ramifications of the law for companies and individuals involved in a bankruptcy filing. I hope many of your questions will be answered there.

 

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