0. Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 10:
Insolvency- Liquidation and reorganization
Slides Authored by Scott D. Hanson
Dickinson State University

1. Bankruptcy – Chapter 7 Bankruptcy Reform Act of 1978
Commonly known as “Liquidation”
Cease all operations
Trustee is assigned by the bankruptcy court
Trustee sells (liquidates) assets
Trustee pays off creditors
Court voids all contracts
Court forgives any unpaid debts.
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2. Bankruptcy – Chapter 11 Bankruptcy Reform Act of 1978
Commonly known as “reorganization”
Continue operations
Court appoints creditor committee and possibly a trustee
Committee works with company management to develop reorganization plan
Court alters or voids contracts and debts as needed.
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3. Unsecured Claims Categories in Order of Priority
Administration expenses, fees and charges incurred in administering the bankruptcy.
Wages, salaries & commissions earned by employees in 90 days before filing (<$4,650)
Amounts owe to employee benefit plans for services provided in previous 180 days.
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4. Unsecured Claims Categories in Order of Priority (cont.)
4. Repayment of up to $2,100 to any individual who prepaid for purchase, lease, rent of property or services not delivered or performed.
5. Unpaid taxes.
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5. Bankruptcy Petition
Voluntary - the debtor files for bankruptcy “protection” from the court.
Involuntary – creditor or creditors file bankruptcy petition requesting court either liquidates or reorganizes debtor company.
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6. Creditors in a Bankruptcy
Creditors are owed payment, goods or services by a debtor.
Creditor claims are:
- Fully Secured
- Partially Secured
- Unsecured
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7. Classes of Creditors
Fully Secured – 100% or more of the amount owed is secured by a lien or pledge of specific assets.
Partially Secured – some portion less than 100% of the amount owed is secured by a lien or pledge of specific assets.
Unsecured – No portion of amount owed is secured by lien or pledge of specific assets.
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8. Contractual Agreements outside Bankruptcy
An extension of payment periods
Composition agreements – partial payment
Creditors’ committee – manages business
Voluntary assignment of assets with a trustee for the benefit of the creditors
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9. Advanced Accounting by Debra Jeter and Paul Chaney
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