Accountants' Handbook Volume Two: Special Industries and Special Topics, Eleventh Edition

Chapter 45. BANKRUPTCY

Grant W. Newton, PhD, CPA, CIRA

Pepperdine University

OVERVIEW

This chapter contains a brief description of the Bankruptcy Code, a discussion of the services that can be rendered by the accountant, and an introduction to the problems faced by accountants working in the bankruptcy area.

ALTERNATIVES AVAILABLE TO TROUBLED COMPANIES

The debtor's first alternatives are to locate new financing, to merge with another company, or to find some other basic solution to its situation that avoids the necessity of discussing its problems with representatives of creditors. If none of these alternatives is possible, the debtor may be required to seek a remedy from creditors, either informally (out of court) or with the help of judicial proceedings.

(a) OUT-OF-COURT SETTLEMENTS.

The informal settlement is an out-of-court agreement that usually consists of an extension of time (stretch-out), a pro rata cash payment for full settlement of claims (composition), an issue of stock for debt, or some combination. Developing an out-of-court settlement may take several forms. For example, the debtor, through counsel or credit association, calls an informal meeting of the creditors for the purpose of discussing its financial problems. In many cases, the credit association makes a significant contribution to the out-of-court settlement by arranging a meeting of creditors, providing advice, and serving as secretary for the creditors' committee.

A credit association is composed of credit managers ...