CH 24: Bankruptcy

Chapter 7 Bankruptcy

Involves procedures for liquidating a failed firm, appointing a trustee to liquidate assets within 3-6 months.

Chapter 11 Bankruptcy

Outlines procedures for reorganizing a firm, allowing it to continue operating while restructuring its debts.

Debtor-in-Possession (DIP)

The management that remains in control of the firm's operations during Chapter 11 bankruptcy, supervised by the bankruptcy court.

Super-priority financing

Allows a company to offer new lenders priority payments over other creditors during bankruptcy.

Cramdown

A process in Chapter 11 where a judge can force creditors to accept a reorganization plan even if they do not agree.

Absolute priority

A rule stating that stockholders and low-priority creditors can retain interest in the reorganized company only after higher-priority creditors are paid in full.

Altman’s Z-score

A quantitative model used to predict bankruptcy risk within one to two years based on financial ratios.

Underfunded pension plans

Pension plans that lack sufficient assets to pay promised benefits, which can be terminated in bankruptcy with PBGC assistance.

Priority of claims in Chapter 7

The order in which a debtor's assets are distributed among creditors, specified in Chapter 7 of the Bankruptcy Act.

Tax loss carryforward

A provision allowing a reorganized firm to offset future taxable income with losses carried forward from prior years.