Briefly describe U.S. bankruptcy law, including the following terms: (5) Involuntary bankruptcy

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Briefly describe U.S. bankruptcy law, including the following terms: (5) Involuntary bankruptcy

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Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
Briefly describe U.S. bankruptcy law, including the following terms:
(1) Chapter 11

Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
Briefly describe U.S. bankruptcy law, including the following terms:
(2) Chapter 7

Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
Briefly describe U.S. bankruptcy law, including the following terms:
(3) Trustee

Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
Briefly describe U.S. bankruptcy law, including the following terms:
(4) Voluntary bankruptcy

Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
Briefly describe U.S. bankruptcy law, including the following terms:
(5) Involuntary bankruptcy

Explanation & AnswerSolution by a verified expert

Explanation

Bankruptcy law is a legal procedure that helps a company in financial distress to develop a plan to resolve its inability to pay debts. It helps protect the interest of both the creditors and the company during the reorganization or liquidation process.
 
Chapter 11 of the bankruptcy law deals in the reorganization of the company's debt during financial distress. Filing for bankruptcy under chapter 11 helps the company delay its debt payment without any penalty, issue additional financing to make its financials strong to repay its obligations. The reorganization procedure is guided by the court and ensures fairness and feasibility of the reorganization plan.

Verified Answer

Bankruptcy law: It is a legal procedure that helps a company in financial distress to resolve its inability to pay debts.
 
Chapter 11 is a section from the bankruptcy law that deals in reorganization in case a company files for bankruptcy from the financial management viewpoint.

Explanation

Chapter 7 is a section from the bankruptcy law that comes into play when reorganization through Chapter 11 is not feasible by the management. It explains the procedures to be followed while liquidating the firm. The court assigns a trustee to liquidate the assets and distribute the proceeds. The court exercises Chapter 7, when the management is not able to liquidate competently.

Verified Answer

Chapter 7 is a section from the bankruptcy law that lists the detailed procedure to be followed while liquidating a firm.

Explanation

After a company files for bankruptcy protection under Chapter 11 of the bankruptcy law, the court may appoint a trustee to take control of the company during the reorganization process. The company does not have to appoint a trustee unless the court considers its management incompetent or suspects some fraud during reorganization under Chapter 11. However, in liquidation under Chapter 7, the court necessarily appoints a trustee for the sale of assets of the company and distribution of proceeds to the creditors.

Verified Answer

A trustee is a third party appointed by the court who retains the control of the company under Chapter 11 of the bankruptcy law if the current management is deemed incompetent or a fraud is suspected by the court. A trustee is necessarily appointed during liquidation under Chapter 7.

Explanation

A situation where the firm's management files a petition for bankruptcy in the courts is known as the voluntary bankruptcy. The bankruptcy is filed under Chapter 11 of the bankruptcy law when the company is unable to pay its debt obligations.

Verified Answer

Voluntary bankruptcy is a situation where the firm’s management files a petition for bankruptcy in the courts under Chapter 11 of the bankruptcy law.

Explanation

A situation where the firm's creditors file the petition for bankruptcy in the courts is known as involuntary bankruptcy. Creditors do so if they are afraid that they will not be paid unless a bankruptcy procedure takes place.

Verified Answer

Involuntary bankruptcy is a situation where the firm’s creditors file the petition for bankruptcy in the courts under Chapter 11 of the bankruptcy law.

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