Why and How to Prevent the Trade in Bankruptcy - Coursework Example

Analyzing why and how to prevent the trade in bankruptcy Letter of transmittal Dear I hereby submit my assignment report on analyzing why and how to prevent the trade in bankruptcy, the business field which is faced by many uncertainties and also risk taking to both debts and creditors should be regulated to save gourd their property. Prevention of trade in bankruptcy is one way that the federal government has enacted gourd and try to minimize risk. I hope you shall find my report satisfactory Yours sincerely Table of Contents Letter of transmittal 2 Table of Contents 3 Executive Summary 4 Reference 13 Executive Summary The paper will be a study of it will use vivid examples to illustrate why and how to prevent the trade in bankruptcy. The federal government has enacted regulation to prevent trade in bankrupts with the aim of preventing and also save guarding the creditor’s property. Reason of prevention of trade in bankruptcy is discusses in the paper. Additionally the paper will also discuss some of this regulation that the court has put in place to ensure that the bankrupt do not trade in the regulated market. Measures taken to ensure that every creditor will have the available information on theirs debtors to try minimize risk in business operations. Introduction Bankruptcy is the condition of financial failure, which is mainly caused by not having the money they need to pay their debts. It is said that legal procedure for liquidating a business which may be owned by an individual and it is not able to pay its debts out of its current assets. Bankruptcy can be brought upon ones self by an insolvent debtor which is referred to as voluntary bankruptcy or it may be forced on court order, which are issued on the creditor’s petition, which is called involuntary bankruptcy. In the US constitution, bankruptcy which is defined as the legal procedure dealing with debt problem on a case filed under one chapter of 11 titles of U.S.A code (Packer, 2013). On the other hand, insolvency is the legal term which is used where the liabilities of a person or firm exceeds its assets. In practice, insolvency is the situation where an entity cannot raise enough money to meet its required obligations or to pay debts as they become due for payment. Nevertheless a properly called technical insolvency occur in case of entity value exceed its liability (Orol, 2013). History of Bankruptcy In the ancient Greece, which is well known as the mother of accounting bankruptcy did not exist, when a man owed and was unable to pay his family which included wife and children were taken and forced to debt slavery. They stayed in slavery until the creditor recouped his loosed which were compensated through their physical labour which was limited to a period of five years. However, there was an exception to the rule which was Athens which by the law of solon it forbade enslavement for debt which made most Athenians slaves to foreigners (Orol, 2013). In the Old Testament, the 7th year was a decreed by the famous mosaic rules written in the holy bible as a sabbatical year wherein the release of al debts owned. The seventh, sabbatical year, which simply can be called the forty ninth year was followed by another sabbatical year which is known as the year of jubilee. Here all debts were mandated for fellow community members and even foreigners also during this time the release of debt-slave was also mandated which was marked by the day of atonement on 10th day of the 7th biblical month following the blowing of trumpets throughout the land of Jerusalem (Carmen, 2009). The Islamic teaching according to the holy Quran, an insolvent person was given enough time to raise money for the payment of his debt, which is recorded in the second chapter (Sura Al-Baqara) verse 280 which says “and if someone is in hardship, then let there be postponement until a time if ease but if you give from your right as a charity then its better for you if you only knew”. In the English law which were written in 1542 in the statute dealing with bankruptcy or insolvency, and documented in East Asia, the Al-Maqrizi the Yassa of Genghis Khan was deemed for death for being bankrupt. (Carmen, 2009). Bankruptcy cost of debt According to the corporate finance, bankruptcy costs of debt are the increased cost of financing with debt rather than equity, which results from a higher frequency of bankruptcy. Since bankruptcy is a costly process, and also a transfer of ownership, it implies that the cost negatively will affect the overall value of the firm. Financially, when a firm goes bankrupt, all of its investors will whom will be holding its debt at the period are expected to lose a part or all of their investment, alternatively, investors require high return rates when investing in bonds of a firm which through estimation can go bankrupt more easily. This hence suggests that an increase in debt, which in turn rises firm bankrupcy (Orol, 2013). However in the trade-off theory of capital structure, organizations and firms are expected to choose their own level of debt financing by trading off some of these bankruptcy costs of debt against the tax benefits of debt (Carmen, 2009). Modern law and bankruptcy restructuring To allow continuity and also rehabilitation of business, which are found to be experiencing financial stress, the principle focus on the modern insolvency registration and business bankruptcy practices does not exist on the notion of elimination of insolvency entities by the remodeling of the set financial and organizational structures of debtor. Since it if has been established to be insufficient to dismiss debts after a certain period for private household, it has been found to be advisable first to assess the underlying problem and also minimize the risk of the financial distress to re-occur. The use of a supervised rehabilitation period, debt advice, financial education, and also looking for help to secure other income sources to manage household expenditures better require to be more or equally provided during this period of rehabilitation. In the US, discharge is conditioned to a lesser extent (Orol, 2013). Bankruptcy effects When one is announced bankrupt by the court, the person is expected to stop using his cheque book and banks cards and then also expected to hand them over to the official receiver with an immediate effect, this means that his accounts are frozen by the bank on the realization that he is the individual is termed bankrupt, and all his monies confiscated by the law. The individual is expected to make alternative arrangement by which he is able to receive and access money in his account and also paying some of the standing orders, and other direct debits which may include some bills like power and electricity. The money, which was in the account automatically becomes the asset in bankruptcy and can be claimed by the official receiver on the trustee. One is free to open a new bank account on the account that he shall explain to the bank that he is already bankrupt (Weidner, 2012). The home of a bankrupt person whether it is freehold or leasehold mortgage or otherwise, the home interest is taken up by the trustee which explains that it may be sold for paying some of the outstanding debts. In the case that the family lives there, which by family mean husband, safe and/or children with the bankrupt person one get a year before the house is put for sale after it is announced to be bankrupt. The period is allocated to allow one to make arrangements to get a new apartment where he can sell the house to any willing able buyer who might be a husband, wife relative or anyone whom one perceives best for the deal. The law does not spell the worth of the house hence one can sell the house at whatever price to prevent the trustee from selling it Taxes attribute and change of control A business that is attempting to reorganize itself by reworking its capital structure through spinning off divisions in the aim to preserve as much existing net operating losses (NOLs). The NOLs which are carried against taxable income in the two previous years which to some extent they were not used up and may be carried forward for 20years. This makes all losses remain with the debtor during a bankruptcy case since a bankruptcy filing for a corporation merely does not create a new taxable entity (Kaufman, 2003). Alternatively, the fly in the ointment which is the provision in the internal revenue code (IRC)which limits the ability of a firm to preserve its NOLs upon a change of ownership, where the vast majority of all corporate reorganizations will change their ownership, which is in the Cap 11 sec 382 of the IRC. after a change of ownerships effected, a plan to follow to reorganize, tax attributes that are left after giving effect to other attribute reduction rules in the IRC are all subjected to an annual limitation on future use, which are limited to long-term as exempt bond rate(Sandage, 2006). Trading claims in bankruptcy Due to non existence of a predicting degree of certainty in the current economic climate, the firm remains with the same shareholders and creditors at the long run. The proliferation of culture funds and other traders in the distressed securities will provide a ready market for creditors and other shareholders who may want to disconnect their losses without waiting up until confirmation that a reorganization plan may take place until several years. In the unregulated markers, disparities in resources and also expertise between creditors and other sophisticated claims have been thought to create abuse potential. Bankruptcy orders have created a bib role in accessing and monitoring and also preventing claims trading. In addition to that court scrutiny has also been brought to bear since buying claims against a company it later decides to convert its debt to equity as part of reorganizing (Douglas, 2003). In an open-ended bankruptcy court scrutiny of fairness of a pending case will provide the transferee subsititution as the holder of a claim after claim filling, which is required by court approval after notice and hearing. In this situation, potential transferees are provided with a notice to transferee, however, all other creditors and all interested parties in the bankruptcy case. With the express on an intention of curtailing judicial oversight of claims like trading by limiting the requirement of court approval. With the current prevailing conditions, there are no requirements to give a notice to any other person other than the court and the transferor. Additionally parties to the trade are not required to disclose the terms of transfer where a transferor is obliged to make a timely objection to transfer the court is given the mandate for transfare determination has been made that is enforceable under non bankruptcy law(Mańko, 2013). Restrictions that apply in a bankruptcy One is required to aware that any inheritance received prior to a bankruptcy announcement should be paid to the official receiver who mainly is the trustee in bankruptcy which is intended to contribute towards debts owed to your creditors. However, in the case where the inheritance amount exceeds the creditors the balance will be returned to the payer by the trustee by the trustee in bankruptcy. During the life of bankruptcy, one is not allowed to get credit of the bankruptcy over and above £500 without informing the lender that they are bankrupt. Additionally should the lender then wish to go ahead and deal with you, then it is therefore, becomes your right to accept any offer of credit made to you. Therefore, all letterheads, invoices and other accounting documents and statements, should carry the name in which you were announced bankruptcy this means a personal and other former trading names should be included to ensure that creditors can easily identify you as a potential credit risk (DePamphilis, 2009). As a bankrupt person, it is a criminal offence to be concerned in promoting, forming or even managing a limited company or even working or acting as a company director without permission from a court of law. This includes whether one was previously appointed as a director or not. If one was a director of a ccompany they are expected to resign immediately. In case one was a shareholder of a company the shares in that the company will automatically be vested in your trustee in bankruptcy as an asset of the bankruptcy estate (Balleisen, 2001). Disadvantages of bankruptcy The process of being announced as bankruptcy in the court comes with a lot of disadvantages, when one is made to be a bankrupt, it means that all his financial affairs and dealings a will be subjected to thorough investigations, a set rate which the bankrupt must contribute to their debts if they earn income making the bankrupt lose most of their valuable property. In the situation of hire purchase companies, there may repossess the bankrupt’s goods under the bill of sale unless monthly payments are maintained where savings or valuable good which were acquired during the bankruptcy may ne taken. Additionally the bankrupt are expected to disclose that when trading under business. A bankrupt person will still be liable for any court fines or maintenance debts (Packer, 2013). A Bankruptcy Responsibility All bankrupts are required by law to take responsibilities to their trustees. Some of these responsibilities include supplying all relevant information to their trustee. Which are required to inform their trustee of any change of name, employments, address or even income. They are also expected to make a contribution by handing their passport to their trustee and also obtaining the permission of the federal court to travel overseas. They are also required to disclose their undercharged bankrupt status if applying for credit (Carmen, 2009). Advantages of being bankrupt Since everything that has its disadvantage must also have its own disadvantages, bankruptcy may also came with some assumed relieve since it wipes the slate clean where it offers a fresh start. One gets a free time since the demands from all creditors stop at once after a person becomes bankrupt and lastly all social securities and pensions including all benefits remain protected by law (Weidner, 2012). Conclusion Bankrupt should ensure that all tools are properly registers and insured. Making payments and ensuring that they are up to date. Bankruptcy will destroy ones credit and may force them to sell their assets; it may in some cases affect their future employment. . Even if bankruptcy offers a new clean slate to start with, it is better for one to avoid being bankrupt that waiting to deal with it after it happens. Getting financial and credit advice from experts its better since it gives on the required knowledge and skills to run his business (Spector, 2012). Recommendation There are things that one should do to avoid bankruptcy. First one should tally their debts to know how much they owe to other and have a true picture of the debt. Secondly gather every bill statement and also every document that has effects on the financial situation. Break down the debts into good and bad categories. Start focusing more on the bad debts and reduce your expenses then divide the expenses to necessities and non necessities where one should only pay for necessities. Lastly one should consult a credit counselor for advices. Reference Carmen M. R., Kenneth S. R. 2009. This time is different: eight centuries of financial folly. Princeton University Press. p.30. Balleisen, E. 2001. Navigating Failure: Bankruptcy and Commercial Society in Antebellum America. Chapel Hill: University of North Carolina Press. p. 322. DePamphilis, D. M. 2009. Mergers, Acquisitions, and Other Restructurings, 5th Edition. Elsevier, Academic Press. Douglas, M.G 2003, Thou Shall Not Trade: Restrictions on Trading in Bankruptcy Retrieved From from < http://www.jonesday.com/thou-shalt-not-trade-restrictions-on-trading-in-bankruptcy/> on 25th march 2014 Kaufman, G. and K. Scott (2003):What is systemic risk, and do bank regulators retard or contribute to it? The Independent Review 7 (3). Mańko, R. 2013. Cross-border insolvency law in the EU. Library Briefing. Library of the European Parliament. Retrieved 21 February 2013. Orol, R. D.,2012 CFTC floats post-PFG, MF Global protections", Market Watch, October 23, 2012. Sandage, S. A. (2006). Born Losers: A History of Failure in America. Cambridge, Mass.: Harvard University Press. Packer, G. 2013. The Unwinding, an inner history of the New America (in English). New York: Farrar, Straus, and Giroux. p. 348 Spector, Mike; Jargon, Julie 2012. Twinkies Maker Preparing for Chapter 11 Filing . The Wall Street Journal. Weidner, D. 2012, "Corzine blundered at MF Global, but how? Commentary: House report focuses on strategy, not customer funds", MarketWatch, Read More