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Bankruptcy and Reorganization

1. 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.

Should the petition for involuntary bankruptcy be granted? Explain.

2. 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.

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

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

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

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

Solution Preview

Please see response attached, which is also presented below. I hope this helps and take care.

Response:

The first two scenarios are interesting! So, let's take a closer look at the provisions allowed for each type of bankruptcy (Chapter 7 and Chapter 11 bankruptcy) in application to the following two scenarios.

1. 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 (note: only creditors can file involuntary bankruptcy) 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.

Question: Should the petition for involuntary bankruptcy be granted? Explain.

No, the petition for involuntary bankruptcy would probably not be granted by the courts, mainly because it is the creditor, not the debtor, who petitions the debtor into involuntary bankruptcy (Chapter 7 bankruptcy). In other words, only the creditor(s) can file petitions for involuntary bankruptcy (under Chapter 7). In this scenario, however, Beren is the debtor, not the creditor.

You might think that all bankruptcy should be considered involuntary, but in fact true involuntary bankruptcy occurs when an individual or organization is made bankrupt at the request of their creditors. Usually the indebted person or company files for bankruptcy but in the case of involuntary bankruptcy the creditor initiates the bankruptcy proceedings by filing a petition to a bankruptcy court so that they can eventually collect the funds they are owed by their debtor. In the case of Chapter 7 involuntary bankruptcy the debtor will be required to liquidate their assets in order to pay off their creditor. On the other hand, if the debtor has a regular source of income that can cover both his living expenses and monthly payments to his creditor the debtor may be allowed to file for Chapter 11 involuntary bankruptcy (Source: http://www.cpafinder.com/bankruptcy-and-credit/involuntary-bankruptcy.html).

Another consideration is that generally, Beren could not file for bankruptcy (e.g., voluntary bankruptcy, for example) without a vote of the directors (i.e., Elliot and Mannino), mainly because they are his partners and he is only one of the partnerships. Obviously, there was no vote because the scenario states that Elliot and Mannino disagreed with Beren (Source: http://boards.lp.findlaw.com/cgi-bin/WebX.fcgi?14@159.m26HbHOZ15g%5E0@.ef05ad1/164).

2. 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, was 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 (they would have to agree to a lesser amount and approved by the courts).

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

No, it is very unlikely that the bankruptcy court will confirm the debtor's plan of reorganization, without some revisions to the reorganization plan proposed by Friese.

Why?

Briefly, in reorganization, creditors might be provided with a better opportunity to recoup what they are owed. Chapter 11 of the Bankruptcy Code governs this type of bankruptcy. Chapter 11 generally applies to individual debtors with excessive or complex debts, as in our example of Mr. ...

Solution Summary

Referring to the case scenarios and by responding to the questions, this solution examines aspects of bankruptcy, Chapter 7, reorganization, reasons for bankruptcy and interest rates.

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