Chapter 24 provides knowledge of bankruptcy, reorganization, and liquidation. This chapter presents the following content: Financial distress process, federal bankruptcy law, reorganization, liquidation. | CHAPTER 24 Bankruptcy, Reorganization, and Liquidation Topics in Chapter Financial distress process Federal bankruptcy law Reorganization Liquidation What are the major causes of business failure? Economic factors industry weakness poor location/product Financial factors too much debt insufficient capital Most failures occur because a number of factors combine to make the business unsustainable. Do business failures occur evenly over time? A large number of businesses fail each year, but the number in any one year has never been a large percentage of the total business population. The failure rate of businesses has tended to fluctuate with the state of the economy. What size firm, large or small, is more prone to business failure? Bankruptcy is more frequent among smaller firms. Large firms tend to get more help from external sources to avoid bankruptcy, given their greater impact on the economy. What key issues must managers face in the financial distress process? Is | CHAPTER 24 Bankruptcy, Reorganization, and Liquidation Topics in Chapter Financial distress process Federal bankruptcy law Reorganization Liquidation What are the major causes of business failure? Economic factors industry weakness poor location/product Financial factors too much debt insufficient capital Most failures occur because a number of factors combine to make the business unsustainable. Do business failures occur evenly over time? A large number of businesses fail each year, but the number in any one year has never been a large percentage of the total business population. The failure rate of businesses has tended to fluctuate with the state of the economy. What size firm, large or small, is more prone to business failure? Bankruptcy is more frequent among smaller firms. Large firms tend to get more help from external sources to avoid bankruptcy, given their greater impact on the economy. What key issues must managers face in the financial distress process? Is it a temporary problem (technical insolvency) or a permanent problem caused by asset values below debt obligations (insolvency in bankruptcy)? Who should bear the losses? Would the firm be more valuable if it continued to operate or if it were liquidated? (More.) Key Issues (Continued) Should the firm file for bankruptcy, or should it try to use informal procedures? Who would control the firm during liquidation or reorganization? What informal remedies are available to firms in financial distress? Informal reorganization Informal liquidation Why might informal remedies be preferable to formal bankruptcy? What types of companies are most suitable for informal remedies? Informal Bankruptcy Terminology Workout: Voluntary informal reorganization plan. Restructuring: Current debt terms are revised to facilitate the firm’s ability to pay. Extension: Creditors postpone the dates of required interest or principal payments, or both. Creditors prefer extension because they are .