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Bankruptcy

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Consider the following cases on Bankruptcy and Reorganization.

Petition
In March 1988, Daniel E. Beren, John M. Elliot, and Edward, F. Mannino formed Walnut Street Four, a general partnership, to purchase and renovate an office building in Harrisburg, Pennsylvania. They borrowed more than $200,000 from Hamilton Bank to purchase the building and begin renovation. Disagreements among the partners arose when the renovation costs exceeded their estimates. When Beren was unable to obtain assistance from Elliot and Mannino regarding obtaining additional financing, the partnership quit paying its debts. Beren filed an involuntary petition to place the partnership into Chapter 7 Bankruptcy. The other partners objected to the bankruptcy filing. At the time of the filing, the partnership owed debts of more than $380,000 and had approximately $550 in the partnership bank account.

1. Should the petition for involuntary bankruptcy be granted? Explain.

Plan of Reorganization
Richard P. Friese (Debtor) filed a voluntary petition for Chapter 11 bankruptcy. In May 1989, Debtor filed a plan of reorganization that divided his creditors into three classes. The first class, administrative creditors, were to be paid in full. The second class, unsecured creditors, were to receive 50% on their claims. The IRS was the third class. It was to receive $20,000 on confirmation and the balance in future payments. No creditors voted to accept the plan. The unsecured creditors are impaired because their legal, equitable, and contractual rights are being altered.

2. Can the bankruptcy court confirm the debtor's plan of reorganization? Explain.

In the business arena, filing for bankruptcy-stopping creditors from taking legal action-has evolved into just another business strategy.

The three most common types of bankruptcy are:

Chapter 7: The bankrupt's assets are sold to pay creditors, and creditors have no right to the debtor's future earnings.

Chapter 11: A business continues to operate and creditors receive a portion of both current assets and future earnings. This form of bankruptcy is also available to wealthy individuals. (See Wards.com)

Chapter 13: For the typical consumer, where creditors usually receive a portion of the individual's current assets and future earnings.

Although bankruptcy laws are sometimes abused (an individual may file personal bankruptcy every seven years and some individuals do exactly that), bankruptcy is designed as a safety net for businesses or individuals who experience financial difficulties for whatever reason.

3. Who may file Chapter 7 bankruptcy? How has this changed over the past few years?

4. What are some of the reasons people file bankruptcy?

5. How does bankruptcy affect interest rates on loans? Credit cards?

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Solution Preview

Bankruptcy Law

Consider the following cases on Bankruptcy and Reorganization.

Petition
In March 1988, Daniel E. Beren, John M. Elliot, and Edward, F. Mannino formed Walnut Street Four, a general partnership, to purchase and renovate an office building in Harrisburg, Pennsylvania. They borrowed more than $200,000 from Hamilton Bank to purchase the building and begin renovation. Disagreements among the partners arose when the renovation costs exceeded their estimates. When Beren was unable to obtain assistance from Elliot and Mannino regarding obtaining additional financing, the partnership quit paying its debts. Beren filed an involuntary petition to place the partnership into Chapter 7 Bankruptcy. The other partners objected to the bankruptcy filing. At the time of the filing, the partnership owed debts of more than $380,000 and had approximately $550 in the partnership bank account.

1. Should the petition for involuntary bankruptcy be granted? Explain.
Yes, the court will order the dissolution of the partnership. A trustee will be appointed who will sell of the properties of the partnership and attempt to pay off the debts of the partnership under Chapter 7, however, if the trustee is not able tot pay off all the debts of partnership, then the partners will remain liable for the residual debts. If they cannot pay off their share of the debt then the defaulting partners will have to file for individual bankruptcies.
Plan of Reorganization
Richard P. Friese (Debtor) filed a voluntary petition for Chapter 11 bankruptcy. In May 1989, Debtor filed a plan of reorganization that divided his creditors into three classes. The first class, administrative creditors, were to be paid in full. The second class, unsecured creditors, were to receive 50% on their claims. The IRS was the third class. It was to receive $20,000 on ...

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