Week 5: Bankruptcy
Today, if you take a walk through a typical mall in any given city you will see an impressive array of merchandise. From the latest fashion, to fine jewelry, to the newest technology, consumers are tantalized by the myriad of options. With the ease of obtaining credit cards and the desire to have the best, it is easy for individuals to find themselves in financial trouble. When you add a large home and new cars obtained with little or no down payment, an increasing number of people have found it impossible to meet their recurring obligations. There are also others, be they individuals or businesses, who through no fault of their own find themselves in unmanageable financial debt. An unexpected rise in the cost of materials or a shift in the market can leave business owners with large debt and little options.
This week you will examine one of the last resorts for those with profound levels of debt—bankruptcy. In bankruptcy—defaulting on all debts—all parties lose and legislation has been enacted that ensures it can only take place when no other reasonable options are available. You will be introduced to the various types of bankruptcy that may be filed by either individuals or businesses, and how they differ in degree and in purpose. Finally, you will evaluate the challenges of balancing the rights of the creditor with the needs of the debtor.
- Distinguish between creditor rights and debtor rights
- Articulate the general goals, structure, and outcomes of the bankruptcy process
- Analyze the general process and issues in a Chapter 11 business reorganization
- Compare and contrast a Chapter 13 bankruptcy with a Chapter 7 bankruptcy for individuals
Photo Credit: [AVNphotolab]/[iStock / Getty Images Plus]/Getty Images
This page contains the Learning Resources for this week. Be sure to scroll down the page to see all of this week’s assigned Learning Resources. To access select media resources, please use the media players below and/or the course DVD (as applicable).
Miller, R. (2014). Business law today: The essentials (10th ed.). Mason, OH: Cengage Learning.
- Chapter 15, “Creditors’ Rights and Bankruptcy (only pp. 436- 446)
In Chapter 15, you will consider the different types of bankruptcy and the purpose of each. This will include a discussion of business versus personal bankruptcy, and the advantages and difficulties associated with each type.
Week 5 Overview
Note: The approximate length of this media piece is 14 minutes.
1.Discussion 1: Individual Bankruptcy
When individuals find that the financial circumstances in their lives have gotten unmanageable and debts far exceed income, one option that they may select is filing for personal bankruptcy. Although this may temporarily help with situation, there are also real, long-lasting consequences to filing for bankruptcy that also need to be considered.
Consider the following scenario:
Mary is a 30-year-old divorced woman. She got married at the age of 25, was married for approximately 4 years, and currently has a 3-year-old child. Mary is a financial analyst who earns approximately $60,000 per year. She has a combination of loans, credit card debt, and medical bills totaling $88,000. Her assets are worth $24,000.
After reviewing this information, respond to the following:
- In general, what options are available to an individual in filing bankruptcy?
- What might affect the availability of these options for Mary?
- What other factors might Mary want to consider in making her decision to file bankruptcy?
- What recommendation would you make to Mary and why?
With these thoughts in mind:
By Day 3
Post an initial statement that expresses your thoughts on pursuing backruptcy. The length of your response(s) should be a minimum of 150 words.
2.Discussion 2: Case Study—Debtor vs. Creditor Rights
When bankruptcy does occur, one of the greatest challenges is to balance the rights and needs of the creditor with those of the debtor. Both are in a situation where some loss is inevitable, but the intent is to minimize the effects as much as possible for both parties.
Below is a summary of an actual case. After reviewing the information, you will be asked to respond to several questions.
356 F.3d 518 In re Marlene MOFFETT, Debtor,
Tidewater Finance Company, No. 03-1279. Plaintiff-Appellant,
Marlene Moffett, Defendant-Appellee.
United States Court of Appeals, Fourth Circuit.
Argued: December 3, 2003.
Decided: January 23, 2004.
On January 22, 2001, Marlene Moffett purchased a used 1998 Honda Accord from Hendrick Honda in Woodbridge, Virginia. Moffett agreed to pay $20,024.25 with interest in 60 monthly installments, and Hendrick Honda retained a security interest in the vehicle. Under the purchase contract and Virginia state law, Hendrick Honda had the right to repossess the vehicle in the event of default, subject to Moffett’s right to redeem it. Hendrick Honda assigned its rights under the purchase agreement to Tidewater Finance Company, which subsequently perfected its security interest. According to the bankruptcy court, the automobile was Moffett’s only means of traveling the 40 miles from her home to her workplace at the Federal Emergency Management Agency.
Moffett made her payments in timely fashion for approximately 1 year. Because Moffett failed to make her monthly payments in March and April 2002, however, Tidewater Finance lawfully repossessed the vehicle on the morning of April 25, 2002. Later that day, Moffett filed for voluntary Chapter 13 reorganization. On May 1, 2002, Moffett’s attorney notified Tidewater Finance of Moffett’s bankruptcy filing and demanded return of the vehicle, according to the Bankruptcy Code’s automatic stay and turnover provisions.
Tidewater Finance in turn filed a motion for relief from the provisions, claiming that its repossession of the automobile stripped Moffett and the bankruptcy estate of any interests in the vehicle, except bare legal title and an intangible right of redemption. It therefore asked the bankruptcy court to terminate the automatic stay so that it could sell the vehicle. Tidewater Finance took no steps to dispose of the vehicle or to apply for a new certificate of title.
- How can the interests of both debtor and creditor be fully protected in this case?
- What should the court rule? Explain your answer.
With these thoughts in mind:
3.Group Project: Bankruptcy Negotiations Group Simulation
There are basic differences in the requirements and outcomes of business bankruptcies versus individual bankruptcies. This is in part due to the expectations at the heart of the decision to declare bankruptcy. This week you will assume a specific role in a group simulation of a bankruptcy negotiation dealing with a business considering filing for Chapter 11 bankruptcy.
Please download and review the Bankruptcy Group Simulation Scenario which will be used for the group exercise.
Document: Bankruptcy Group Simulation Scenario (Word document)
As you review the information, pay particular attention to those elements that pertain to the role you have assumed. Your instructor will assign you to a group of no more than 6 people by Day 1 of the week. You and your group members will each assume at least one role. If your group has fewer than 6 members, some people may have to assume an additional role so that all roles are accounted for. Your group will send an email to the instructor by Day 2showing what members are assigned what role, and the instructor may decide to make alterations in order to ensure the best learning outcomes.
- Bankruptcy trustee (and record keeper)
- Long-term bond holder
- Lease holder (lessor) of aircraft leases
- Flight attendants
Your task is to reach a mutually agreeable resolution through negotiations that is fair to all and meets the requirements stated above in order to allow the airline to continue operations. You will use the following guidelines for your activity:
- You will negotiate based on your assigned role; one role will be that of the trustee who will keep records of the current state of negotiations.
- Although in practice this is a multiparty negotiation where all parties are negotiating with all other parties, all offers and proposals will be made through the trustee.
- Representatives of each group should first propose to the trustee how much they are willing to give up. Each party should negotiate both the immediate debt reduction needs and the ongoing expense reductions (through wage/benefit cuts, reductions in outstanding debt, or interest rate concessions, etc.).
- For the employee groups, assume that the currently owed debt is negligible, and thus the only debt that that employees can immediately forgive is from the pension obligation.
- Based on this first round of offered concessions, the trustee can negotiate with the parties individually or can present an overall plan.
- Each party is also free, at any time, to propose an overall plan where total concessions equal the totals needed in order to keep the airline viable. The overall goal is a plan that is acceptable to all groups that meets the two primary criteria. In your negotiations, you should keep in mind that every group must give up something.
Schedule of Activities:
- Your initial response to the trustee of your initial offered concessions is due by Day 3 of this week.
- The trustee will respond by Day 4 of this week.
- Additional rounds of negotiation will continue until a consensus is reached.
- The final submission of the overall plan is due by Day 4 of Week 6. The group member with the role of “Bankruptcy Trustee” is responsible for submitting the group’s work. Remember to include a list of your group’s members and what roles they were assigned.
Your written assignments must follow APA guidelines. Be sure to support your work with specific citations from this week’s Learning Resources and additional scholarly sources as appropriate.