h4 ficpa bankruptcy today what every cpa should know 10-10
TRANSCRIPT
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Bankruptcy TodayWhat Every CPA Should Know
This session is intended to enable you to havean understanding of the Bankruptcy process
When your client or a customer or vendor tell you “ We’re thinking about filing bankruptcy”.
You can provide advice to client or your company
Session Objective
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Bankruptcy TodayWhat Every CPA Should Know
• General background and history• Current statistics • Bankruptcy process• Help clients determine when to file• Assist clients in preparing for bankruptcy• Recordkeeping requirements during bankruptcy• US Trustee reporting requirements• Fresh start accounting• Liability protection for CPA
Session Objective
Year Totals Filings
Business Filings
Non-Business Filings
Consumer Filings as a Percentage of Total Filings
1980 331,264 43,694 287,570 86.81%
1981 363,943 48,125 315,818 86.78%
1982 380,251 69,300 310,951 81.78%
1983 348,880 62,436 286,444 82.10%
1984 348,521 64,004 284,517 81.64%
1985 412,510 71,277 341,233 82.72%
1986 530,438 81,235 449,203 84.69%
1987 577,999 82,446 495,553 85.74%
1988 613,465 63,853 549,612 89.59%
1989 679,461 63,235 616,226 90.69%
1990 782,960 64,853 718,107 91.72%
1991 943,987 71,549 872,438 92.42%
1992 971,517 70,643 900,874 92.73%
1993 875,202 62,304 812,898 92.88%
1994 832,829 52,374 780,455 93.71%
1995 926,601 51,959 874,642 94.39%
1996 1,178,555 53,549 1,125,006 95.46%
1997 1,404,145 54,027 1,350,118 96.15%
1998 1,442,549 44,367 1,398,182 96.92%
1999 1,319,465 37,884 1,281,581 97.12%
2000 1,253,444 35,472 1,217,972 97.17%
2001 1,492,129 40,099 1,452,030 97.31%
2002 1,577,651 38,540 1,539,111 97.56%
2003 1,660,245 35,037 1,625,208 97.89%
2004 1,597,462 34,317 1,563,145 97.85%
2005 2,078,415 39,201 2,039,214 98.11%
2006 617,660 19,695 597,965 96.81%
2007 850,912 28,322 822,590 96.67%
2008 1,117,771 43,546 1,074,225 96.10%
2009 1,473,675 60,837 1,412,838 95.87%
Bankruptcy Filings 1980-2009
2009- 1,473,675
95% consumers
Businesses 60,837
12 of last 29 years were higher
1Qtr 2010 388,148 total
Business 14,607
Ch 11- 3,293Ch 7 – 10,074
2007 33% Ch112009 25% Ch 112010 20% Ch 11
Company Bankruptcy
Date Total Assets
Pre-Bankruptcy
Lehman Brothers Holdings 09/15/08 $691,000,000,000
Washington Mutual 09/26/08 $327,900,000,000
Worldcom, Inc. 07/21/02 $103,914,000,000
General Motors 6/1/09 $91,000,000,000
Enron Corp.* 12/2/01 $63,392,000,000
Conseco, Inc. 12/18/02 $61,392,000,000
Chrysler 04/30/09 $39,000,000,000
Thornburg Mortgage 05/01/09 $36,500,000,000
Pacific Gas and Electric 04/06/01 $36,000,000,000
Texaco, Inc. 4/12/1987 $35,892,000,000
Financial Corp. of America 9/9/1988 $33,864,000,000
Global Crossing Ltd. 1/28/2002 $30,185,000,000
UAL Corp. 12/9/2002 $25,197,000,000
Adelphia Communications 6/25/2002 $21,499,000,000
MCorp 3/31/1989 $20,228,000,000
Mirant Corporation 7/14/2003 $19,415,000,000
First Executive Corp. 5/13/1991 $15,193,000,000
Gibraltar Financial Corp. 2/8/1990 $15,011,000,000
Kmart Corp. 1/22/2002 $14,600,000,000
FINOVA Group, Inc., (The) 3/7/2001 $14,050,000,000
HomeFed Corp. 10/22/1992 $13,885,000,000
Southeast Banking Corporation 9/20/1991 $13,390,000,000
NTL, Inc. 5/8/2002 $13,003,000,000
Reliance Group Holdings, Inc. 6/12/2001 $12,598,000,000
Imperial Corp. of America 2/28/1990 $12,263,000,000
Federal-Mogul Corp. 10/1/2001 $10,150,000,000
First City Bancorp.of Texas 10/31/1992 $9,943,000,000
First Capital Holdings 5/30/1991 $9,675,000,000
Baldwin-United 9/26/1983 $9,383,000,000 SF1:0.7.10.100526.9148
20 largest Bankruptcy Cases
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• In medieval Italy, when a businessman did not pay his debts,
(women were not allowed to own property) it was the practice to destroy his trading bench. From Italian for broken bench, "banca rotta," comes the term bankruptcy.
• Creditors ruled, no pay …..prison or death….Henry VIII first legislation in 1542 in England. Many debtors fled to U.S.
• 1938 first US bankruptcy law. 1978 first comprehensive Bankruptcy act, gave courts broad power. Supreme court ruled bankruptcy judges had too much power. Current code was modified in 2006
• Current legislative focus is to allow a debtor to restructure
debts and permit the rehabilitation of a company to continue
Bankruptcy TodayWhat Every CPA Should Know
History
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Bankruptcy TodayWhat Every CPA Should Know
Different Types of Filings - Business
Chapter 11 - Reorganization
Chapter 7 - Liquidation
Chapter 12 – Farmer or Fisherman
Chapter 9 - Municipality
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Bankruptcy TodayWhat Every CPA Should Know
Court Structure
•Federal Court NOT State Court
•Bankruptcy Judge Federal Judge, type I, 14 year term
•Jurisdiction of District Court
•11th Circuit court of Appeals
•Florida 3 districts, Southern, Middle, Northern
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Bankruptcy TodayWhat Every CPA Should Know
Bankruptcy Process
• Petition Date – date the bankruptcy petition was filed
• Automatic Stay – stops creditors
• First day motions
• Cash collateral
• Focus is on confirming a plan of reorganization
• Creditors vote on plan of reorganization
• Chapter 11 can also be used for liquidation/sale
• Debtor-in-possession status – D.I.P.
• Voluntary – Involuntary -3 creditors owed $12k -risky
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Bankruptcy TodayWhat Every CPA Should Know
Bankruptcy Process
CARDINAL RULE
• Debtor cannot pay any pre-petition debt unless specifically authorized by court
• Bankruptcy court can claw back
• Debtor can generally pay post-petition debts if they are ordinary course of business
• Retention of Professionals - Must be approved by Bankruptcy Court BEFORE beginning work! If not retained, cannot be paid! THAT MEANS YOU !!!!!
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Bankruptcy TodayWhat Every CPA Should Know
Bankruptcy Process
• Benefit of CH 11 – breathing room
• Automatic stay freezes all actions against debtor, no pre-petition debt can be paid
• Opportunity for Lien Stripping - Reduce and restructure payment on secured debt
• Unsecured debts are generally paid pennies on the dollar
• Can pay off approved claims up to 6 years-including IRS and Sales Tax
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Bankruptcy TodayWhat Every CPA Should Know
Bankruptcy Process
• Bankruptcy has limited benefit if it is filed too late
• File before significant default or termination
• Leases/Franchise Agreements - Once they are properly terminated, bankruptcy cannot bring them back
• Goods delivered to debtor within 20 days of filing bankruptcy entitled to administrative expense priority !!
• No requirement to make a reclamation demand for this claim. Still required to file motion with court !!
• Vendors may reclaim goods delivered to debtor within 45 days preceding filing !!
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Bankruptcy TodayWhat Every CPA Should Know
Bankruptcy Process•Critical Vendor status !!•Committee of unsecured creditors appointed by U.S. Trustee. Estate pays for Committee’s professionalsCommittee is watchdog and can exert influence over case
•Preferences - Preferring one creditor over another. Ensures pro rata distribution to unsecured creditors. Debtor can recover payments made to creditors during 90 days before petition !! Watch out for security interest granted on old debt. New value exception !!
•Fraudulent transfers – 2 year look back, 4 years for insiders. Company must have been insolvent, received less than fair value !!
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Bankruptcy TodayWhat Every CPA Should Know
U.S. Trustee
• Responsible to watch out for unsecured creditors
and follow guidelines, has voice in all motions, fees
• Special reporting monthly, not your normal financial statements, cash basis, court forms, public record
• Stub period reporting pre and post records, usually a glitch
• Assessed filing fees $30,000 per Qtr based on cash disbursements
• Can request forensic and/or trustee
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Bankruptcy TodayWhat Every CPA Should Know
When To File
•Liquidity crisis, before you hit the wall•Ward off foreclosure, default•When you know it’s hopeless, need to restructure
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Bankruptcy TodayWhat Every CPA Should Know
Preparing For Bankruptcy
•D&O insurance•Hoard cash•Hire professionals, pay retainers•Make sure you have a good Accounts Payable list, all former vendors and employees, and addresses
•Don’t allow cancellation of leases or franchise agreements•Preference payments•Insolvency•Retention of key employees (KERP)•Communication•Leadership
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Bankruptcy TodayWhat Every CPA Should Know
Recordkeeping Requirements
•Books as usual•US Trustee requirements, follow court approved forms, cash based just like a check register•SOFA, and schedules – list all assets liabilities, contracts, leases, payroll master (may want to seal or special request no names)•Insurance policies
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Bankruptcy TodayWhat Every CPA Should Know
Managing Professional’s Liability
•Consult legal counsel•Make sure you get a retainer•Pre-petition debt owed to you•Engagement letter•Conflicts affidavit•Application to employ with court – Before you do work •Make sure everything you do is approved by court•Disgorgement•Time record keeping 6 minute increments•Professional standards same in bankruptcy•Gross negligence and willful misconduct
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Bankruptcy TodayWhat Every CPA Should Know
Bankruptcy - How To Get Out
•Debtor has exclusivity to file a plan for 120 daysPlan filed, creditors get to vote, 50% creditors AND 2/3 money confirms the plan.
• Most bankruptcies last 9mo to year ½ unless a pre-pak•Meet confirmation standard – Feasible and no CH 22•Absolute priority rule
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• Taxes are very complex. Debt forgiveness becomes taxable income.
• Valuation of surviving entity becomes the basis of the new entity
• Accounting guided by:– SOP 90-7– SAB 5-J– SFAS 15– EITF 96-19– (codified by FASB 168 )
Accounting and Taxes
Bankruptcy TodayWhat Every CPA Should Know
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• Bankruptcy in a nutshell- Amazon• Bankruptcydata.com• Westlaw• American Bankruptcy Institute• Pacer system• U.S.Court web site
Helpful Resources
Bankruptcy TodayWhat Every CPA Should Know