 Hello and welcome to this session. This is Professor Farhad and this session we're going to be looking at chapter 11 bankruptcy. In the prior session we looked at chapter 7. This topic is covered in advanced accounting. It's also covered on the CPA exam direct section and indirectly on the FAR section. As always, I would like to remind you to connect with me on LinkedIn. If you don't have a LinkedIn account, please subscribe to my YouTube. I have over 1500 plus accounting, auditing and tax lectures. All my lectures are free on YouTube. Please like them, share them, put them in playlists. Let the world know about them. If you're benefiting from my lecture, it means someone else might benefit as well. This is my Instagram account. This is my Facebook account and this is my website. On my website I often have CPA offer. For example right now, Becker is offering $1,000 off for unlimited access for the CPA program. This is a limited time offer. If I was in your shoes, I will buy this course if I'm studying for my exam or if I'm still a college student where I can supplement my studies during college. Let's go ahead and get started and talk about chapter 11 bankruptcy. Now what is chapter 11? What's the difference between chapter 11 and chapter 7? In chapter 7, what we learn about is the company liquidate. The company go out of business. They go out of business. They're gone. Okay. In chapter 11, what happened is this. The creditors believe it's in their best interest to keep the business alive. So they don't want to put the business out of business because they believe there's a chance that that business might survive in the long run. So what they do is they try to work a plan. They can work the plan informally like what we talked about in the first recording, basically some sort of a contractual agreement or they can go through chapter 11 bankruptcy. So chapter 11 is a reorganization. It's not the liquidation. It's a reorganization. This is liquidation. This is chapter 7. So if a creditor of an unsolving debtor believe it can rehab the business, then they can agree to a plan for reorganization. The plan can be informal and we talked about contractual agreement earlier in the chapter. Look in the playlist or it can be formal, which goes through chapter 11. Now bear in mind, although it goes through chapter 11, the company have an exclusive right to develop its organizational plan within 120 days after which any interest that parties may propose a bankruptcy plan. So first they give the company a chance to reorganize itself. Now the court can extend this reorganization period up to 18 months. So they basically they'll give them the chance to put their act together and hopefully they can reorganize the business. Also the court is supposed to appoint a committee. The court appoint a committee of creditors holding unsecured claims. Usually the committee is composed of the largest seven creditors, obviously because they have the most most of the money involved. Also they could appoint a committee, additional committee of creditors or of stockholders. Also stockholders can be involved as well. In order to assure both creditors and stockholders are represented. Now if a committee of stockholders is appointed, again it will it will be composed of the seven largest equity security holders. So the seven largest equity holders. So what are the power and duties of the committee? Well the committee select and authorize the appointment of one or more attorneys, accountant or other agents, consultant, banker, actuarial, science, whatever is needed to perform services for the committee. They can consult with the trustee or the or the debtor or the debtor concerning the administration of the case. They can investigate the act, conduct, assets, liabilities and financial condition of the debtor, the operation of the debtor's business and desirability of the continuous of such business and any other matter relevant to the case or to the formulation of the plan. So simply put they can look into your assets, your liabilities, your financial conditions, your revenue, your expenses, anything that's relevant to the business they can investigate. They can participate in the formulation of a plan, advise those represented by the committee or of the committee's recommendation as to any plan formulated and collect and file the court acceptance of a plan. They can also request the appointment of a trustee if the trustee has not previously appointed in the case because if first there's a committee sometime the court might assign a trustee. They could request the appointment of the trustee and perform other services in the interest of the people who are represented, who are the interests of the people represented, creditors and to a second degree shareholders but creditors are the most interested. Also the court may permit the debtor to maintain possession of the assets and to conduct the affair of the business or it may appoint a trustee. So the court would say well guess what, I'm going to let you run your own business or what I'm going to do I'm going to bring a trustee. So if a trustee is appointed what is the duties of the trustee? Well be accountable for all property received obviously because that's their job to look after the interests of the creditors. Examine claims and object to the allowance of any claims that's improper. Look at the claims of the creditors whatever is proper we accept whatever is not proper we reject. Furnish information about the estate and the estate's administration to interested parties if somebody's interested what's going on with the what's the status of the case furnish this information. If the business of the debtor is authorized to be if the business of the debtor is authorized to be operated now file file with court okay periodic reports or with any governmental agency charged with the responsibility of collecting any tax arising of such operation you have to file that paperwork. If the debt or has not done so if the debtor not the debtor file with the court a list of creditors a schedule of assets liabilities and the statement of debtor's financial affair usually that's if that's if it's not but usually that is filed. File a plan of reorganization and after the confirmation of a plan file such report that are required by the court to basically make sure the paperwork is being done that's what the trustee is making administer administering the whole operation. Now what would your what would your organization plan involve what would it look like okay it may propose the alteration of legal contractual and equity interests of any class of creditors or equity security holders basically one of one of the reasons or one one reason could be the the the company might have a strong union okay and that union were demanding high salaries and that's why the company could not survive many companies go under because the union is so strong that the company cannot keep making payments so what they do they go through reorganization and as a result the contract between the union and the company will be renegotiated so that's what we mean by alter legal or contractual obligation and sometimes what you do you maybe you wipe out the common the common shareholders or you wipe out half of them or replace them what preferred you do some type of reorganization that's what that's what the whole thing is about what you would do with unsecured creditors they would generally accept a payment that's less than the face value so and they would cancel the remainder so let's assume your unsecured creditor is is a million dollar you would say i have 600 000 i'm gonna pay you and wipe out the rest basically zero the rest now bear in mind the plan must be equitable to all parties by providing for the same treatment for each claim or interest of a particular class so what you do is you take each class separately and you prorate the the benefit to the whole class so you don't treat different people differently within each class and the plan must also contain adequate means for its own execution that is it must contain specific provisions so the plan should have other conditions if this happened what would happen for example the retention of any property by the debtor when would the debtor retain any property the transfer of the property to other entities if you have a sister company when do you transfer the property if there's any merchant or consolidation of the debtor with another company what would what would we do under those circumstances for example the sale of property or the distribution of property to parties of interest you know for distributing any pop and any assets how is that going to be done or the issuance of securities of the debtor for cash property or existing securities of the debtor if we're going to be issuing securities stocks for cash if we're issuing stocks for property or stocks for other stocks how would that happen so basically we have to have a clear plan that's what worse that's what we are saying here so after the plan is filed it must be accepted by two-third in terms of amount okay and one-half which is 50 and the number of allowed claims for each class of creditors so each class of creditors you might have a senior versus secured versus unsecured two-third of the money so if we're looking at a hundred thousand we have to make sure that two-third of this sixty six thousand sixty six point six six plus and half of the creditors agree to that plan okay and two-third in the amount of the allowed interest of each of the class of stockholders again two-third of the shareholders must approve the plan in addition the court must approve the overall fairness of the plan before it will be accepted also the court would review it after the plan has been filed to make sure it is fair so this is basically chapter 11 reorganization the next thing we'll look at is once you get out of chapter 11 you'll get this fresh start we'll talk a little bit more about the fresh start if you have any questions about this topic please email me if you happen to visit my website for additional lectures please consider donating if you are studying for your CPA exam as always study hard it's worth it and see you on the other side of success