Learn about Chapter 7: Bankruptcy Liquidation Video

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Learn about Chapter 7: Bankruptcy Liquidation

Learn about Chapter 7: Bankruptcy Liquidation In the last set of videos we’ve hopefully familiarize ourselves from the different ways that a company can raise capital. And they can do it through death or equity and we learn that – that securities are often called vans. All equity securities are probably familiar with and those are stocks. And then I left you with a cleft finger and let me try it and so they don’t get off myself soon. If this are the assets of a company and it was able to generate disaster. So there’s a couple of ways that you can generate assets. You can get investors through equity and we’ve done of several videos on that and you start with the angel investors or maybe your rich uncle and then you eventually get venture capitalist due initial public offering. And then you can do follow on offerings and so on and so forth. Now we see governments will buy equity in you if you are bank that’s too big to fail but we’ll do a whole playlist on that. So equity, that’s one way that you can get cash or get capitals so that you can buy assets so to run you business. The other way is you can borrow money from people. So the equity holders, they become – these are actually the owners of the company. So you might have been part of the equity holder and have to sells some of the equity. You’re sales some of the equity and you’re sales some share in your company for someone else to get money. And then they become a kind of like your partner. And the other way is you can borrow money. Let draw of that and that will just put generally as liability and death isn’t the only kind of liability but that’s a pretty reasonable simplification for now and there’s other things. In general liability means that you owe something to somebody in the future. Liabilities are not liabilities, well, yeah this are liabilities. So these are liabilities and we will assume right now that your death is your main liabilities. And you might have other liabilities. You might some type of legal liability where someone is suing you or you know, you had spread to its bests on a bunch of playground of the game that was actually good for the playground equipment. And now, you know, there’s all of this liability because as well and now you got the idea. But for now on we’ll have the simplification that – that is your liability. And then we said, well you know, there are different kinds of death. If securitized that and it’s often a bond, right. That be a certificate that says, it’s an IOU from a company and they will pay you coupons or interests and so forth. And you can also just get regular bank that where you own the bank money. And I left you with a question the last time around. And I said let say this company goes into Bankruptcy and let say that this assets are worth of what we think they are, right. In this world if just we have to sell off these assets. Fine , the equity, you know, the death guys were get paid off and then the equity guys were get left over with whatever else. So let say if this was, if on our books, so you never hear things like book value and then you have done a couple of videos on book value versus market value. But the book values essentially what you have it on your counting books. And you say that this is worth to $10 million, right, let say we’ve bought land and factories and whatever else worth %$10 million. Let say your death is $6 million and your equity would be worth $4 million. And let say for whatever reason the economy turns out or you know, maybe this would some type of business that is now not valuables. So, it’s going to go on a bankrupt until now I’ll give a little bit more specific on the different types of bankrupts. See that we are assuming liquidation, right. Actually I’ll just get specific right now and so it for the die. So when we say of bankruptcy, a bankruptcy is probably it’s a very common word and then I think most people have a general sense what it means. And they know it’s bad and that means to some degree that a company can’t operate it as it was before but there’s a lot of confusion over what it means. There are actually two types of bankruptcy – there is liquidation. And that’s mean essentially saying that you know what this business doesn’t it make any sense. It doesn’t make some stuff have the employees and run the factories. You’re never going to make any money, so you might as well just sell everything you have and you liquidate it all. That’s one type and that falls on the category of the chapter seven and we’re just talking about of corporate bankruptcy right now. And there’s also a personal bankruptcy and we’ve will do a couple videos on that. And it might be especially relevant in this economy. Well, the other type is reorganization or restructuring. And restructuring says, you know what, this factory here it take you making something useful. It’s due actually generating money and actually we can get more value for what we have here if we keep it running. And we will just keep it running and we will restructure the company. And usually that means to change this hand – this side of it. So maybe we will cancel some dead now and then. Well, I show you how that’s done in a reasonably faraway. But just to get – just to understand of kind of a simplified scenario, let’s take liquidation into consideration. So, let say that this was my website selling shoes online. And then all of a sudden people have stopped wearing shoes. It’s just going out of the fashion, so it makes no sense anymore to sell shoes online. So I’m just going to liquidate my assets, my real state that I might have, my warehouse and etc. And my question that I left you within the last video was who gets it? So let say when we liquidate it, so we go into bankrupt see in this and essentially all of the assets were taking into possession by the bankruptcy court. And they were going to sell these assets and let say when they sell them, they don’t get $10 million for this assets. They only get, I don’t know, they only get $5 million for them, right. I paid it for them to give that they are useful in some way but they end up not to be. So my assets, some you see for a reason that you raise some things. Anyway just realize, when I talk earlier about, you know, there’s two ways to raise company and there’s a third way to raise a company, right. You can sell shares, you can issue of death and you can borrow money. And then off obviously the third way is actually you just make money, right. Once you start a company, hopefully you generate earning and that will also generate cash or capital that you can reinvest in the business. And we’ll talk about that for I just want to make it clear that’s obviously the best way to generate capital for your business is one the business itself generates capital. So let say that this assets when you actually sell them off that are worth of $10 million anymore that they are worth and they make the point to smaller and they are worth $5 million, so my question to the last videos, who gets this $5 million due somehow split it evenly between all of this people or does one want have get more of it or one have get just less of it. And I think you’ll get a sense but based on how I, were I talk the $5 million out of who gets the money. It’s the death holders. And the way I draw it right here you kindly view it to us as you go up in this direction. And you’re getting more senior or if you going down in this way, you’re getting more junior. And seniority, when you talk about a companies capital structure is just, you know what if there is anything left who gets their money first. And even within the death, you’ll have different layers of death. And they told there might be different death holders who have different levels of seniority. So this one might be called senior secured death, senior means they are high up on the stock. That they are one of the first people to get their money and secure means that there is actually some collateral on the asset side that they get if the company can’t pay. So maybe this is like a piece of land, right. So just in kind of our everyday personal finance world and you more get is actually that secured death. It secured by the collateral of your home. If you can’t pay the death, the bank comes and takes your home for closes on the property. So that’s what secured means, it means that there are some collateral. And in the event of a bankruptcy, this guy can immediately go and get the collateral that his death is secured by. So this a considered a very senior former death, senior secured then you might have here you might have of senior unsecured. And there’s lot of words around you. You know, senior, junior subordinate on all of that but this is get that there is just a hierarchy here. And some people are the first people to get the money and then whatever it might left goes. So this person that if there’s any money left to goes to this person and then if there’s anything left it goes to this person. And once you are in bankruptcy could it does tend to be in a negotiation between the different, you can almost view on buckets of death. And we will do more complicated example on the future on that that will actually deal into the details of bankruptcy. But this is general notion that the senior guys got made whole first then the more junior guy’s gets whatever is left and so on and so forth. And if there’s no money for the equity, there’s no money for the equity and that make sense, right. Because the death holders, you know, that all of they were getting their off side which is just to interest, right. So there also that you should get limited downside and even to things that turn bad. Equity holders, they can have taken gambles and things were great. They will get all of the upside and now that thing is turn bad and they take a lot of the downside. And they are actually lucky that they don’t owe money. That’s actually that I guess you could call it the beauty of a corporate structure. That you have limited liability and sometimes in history this people would actually owe the difference. And they would actually owe these extra million dollars that they can and did argue with death that are in prison in all of that could it will talk more about in the future. So anyway, just going back on the different trenches of death or buckets of death, so we could call this senior unsecured and that means that they are still senior. And they still fairly high off the seniority lather but they are unsecured. There is no particular asset that they can go run but as long as there is enough for them, don’t get it. So let me put some numbers here. So let say there was, I don’t, 1 million of senior secured and let say there is 2 million of senior unsecured and let say that this is 2 million of subordinated. Subordinated just means are not senior unsecured. So in this real time, what we have is bankruptcies were they liquidate all of the stuff and then they will handle out in the order of seniority. These guys get the million dollars back, so they made it whole. And then probably we charge a lower interest rate because they didn’t perceive the risk that high to begin with. And this guys, right here the senior unsecured, it will get the next 2 million and then there is $1 million left, right. And that $1 million will go to this subordinated death. So they will get 50% of their money back. So they talk a little bit of hit but that’s okay because one this were good and they probably get high interest to compensate them for the risk. And usually as you get more and more junior and you take on more risk that you get more upside or more interest. And then in this case the equity holders get nothing and they get wipe out. So it just goes to zero, so that’s the answer to the question I said who get the money, well it’s the death holders get first and if there was actually $7 million instead of $5 million then you would have paid. So if this was $7 and you would have paid the $6 off completely and now the equity holders would have got $1 million. And the death would have got something if there was enough money that they handled to them. Anyway in the next video I’ll cover, this was liquidation or we just say this in worth running and let just give it all away or let sell it and give it back to our creditors. To the next video I’ll talk about reorganization or we say, hey, you know what this business is a good business. So it just has two many liabilities and see you to the next video.

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Learn about Chapter 7: Bankruptcy Liquidation

In the last set of videos we’ve hopefully familiarize ourselves from the different ways that a company can raise capital. And they can do it through death or equity and we learn that – that securities are often called vans. All equity securities are probably familiar with and those are stocks. And then I left you with a cleft finger and let me try it and so they don’t get off myself soon. If this are the assets of a company and it was able to generate disaster. So there’s a couple of ways that you can generate assets. You can get investors through equity and we’ve done of several videos on that and you start with the angel investors or maybe your rich uncle and then you eventually get venture capitalist due initial public offering. And then you can do follow on offerings and so on and so forth. Now we see governments will buy equity in you if you are bank that’s too big to fail but we’ll do a whole playlist on that.

So equity, that’s one way that you can get cash or get capitals so that you can buy assets so to run you business. The other way is you can borrow money from people. So the equity holders, they become – these are actually the owners of the company. So you might have been part of the equity holder and have to sells some of the equity. You’re sales some of the equity and you’re sales some share in your company for someone else to get money. And then they become a kind of like your partner. And the other way is you can borrow money. Let draw of that and that will just put generally as liability and death isn’t the only kind of liability but that’s a pretty reasonable simplification for now and there’s other things.

In general liability means that you owe something to somebody in the future. Liabilities are not liabilities, well, yeah this are liabilities. So these are liabilities and we will assume right now that your death is your main liabilities. And you might have other liabilities. You might some type of legal liability where someone is suing you or you know, you had spread to its bests on a bunch of playground of the game that was actually good for the playground equipment. And now, you know, there’s all of this liability because as well and now you got the idea. But for now on we’ll have the simplification that – that is your liability. And then we said, well you know, there are different kinds of death. If securitized that and it’s often a bond, right.

That be a certificate that says, it’s an IOU from a company and they will pay you coupons or interests and so forth. And you can also just get regular bank that where you own the bank money. And I left you with a question the last time around. And I said let say this company goes into Bankruptcy and let say that this assets are worth of what we think they are, right. In this world if just we have to sell off these assets. Fine , the equity, you know, the death guys were get paid off and then the equity guys were get left over with whatever else. So let say if this was, if on our books, so you never hear things like book value and then you have done a couple of videos on book value versus market value. But the book values essentially what you have it on your counting books.

And you say that this is worth to $10 million, right, let say we’ve bought land and factories and whatever else worth %$10 million. Let say your death is $6 million and your equity would be worth $4 million. And let say for whatever reason the economy turns out or you know, maybe this would some type of business that is now not valuables. So, it’s going to go on a bankrupt until now I’ll give a little bit more specific on the different types of bankrupts. See that we are assuming liquidation, right.

Actually I’ll just get specific right now and so it for the die. So when we say of bankruptcy, a bankruptcy is probably it’s a very common word and then I think most people have a general sense what it means. And they know it’s bad and that means to some degree that a company can’t operate it as it was before but there’s a lot of confusion over what it means. There are actually two types of bankruptcy – there is liquidation. And that’s mean essentially saying that you know what this business doesn’t it make any sense. It doesn’t make some stuff have the employees and run the factories. You’re never going to make any money, so you might as well just sell everything you have and you liquidate it all. That’s one type and that falls on the category of the chapter seven and we’re just talking about of corporate bankruptcy right now. And there’s also a personal bankruptcy and we’ve will do a couple videos on that. And it might be especially relevant in this economy.

Well, the other type is reorganization or restructuring. And restructuring says, you know what, this factory here it take you making something useful. It’s due actually generating money and actually we can get more value for what we have here if we keep it running. And we will just keep it running and we will restructure the company. And usually that means to change this hand – this side of it. So maybe we will cancel some dead now and then.

Well, I show you how that’s done in a reasonably faraway. But just to get – just to understand of kind of a simplified scenario, let’s take liquidation into consideration. So, let say that this was my website selling shoes online. And then all of a sudden people have stopped wearing shoes. It’s just going out of the fashion, so it makes no sense anymore to sell shoes online. So I’m just going to liquidate my assets, my real state that I might have, my warehouse and etc.

And my question that I left you within the last video was who gets it? So let say when we liquidate it, so we go into bankrupt see in this and essentially all of the assets were taking into possession by the bankruptcy court. And they were going to sell these assets and let say when they sell them, they don’t get $10 million for this assets. They only get, I don’t know, they only get $5 million for them, right. I paid it for them to give that they are useful in some way but they end up not to be. So my assets, some you see for a reason that you raise some things.

Anyway just realize, when I talk earlier about, you know, there’s two ways to raise company and there’s a third way to raise a company, right. You can sell shares, you can issue of death and you can borrow money. And then off obviously the third way is actually you just make money, right. Once you start a company, hopefully you generate earning and that will also generate cash or capital that you can reinvest in the business. And we’ll talk about that for I just want to make it clear that’s obviously the best way to generate capital for your business is one the business itself generates capital.

So let say that this assets when you actually sell them off that are worth of $10 million anymore that they are worth and they make the point to smaller and they are worth $5 million, so my question to the last videos, who gets this $5 million due somehow split it evenly between all of this people or does one want have get more of it or one have get just less of it. And I think you’ll get a sense but based on how I, were I talk the $5 million out of who gets the money. It’s the death holders. And the way I draw it right here you kindly view it to us as you go up in this direction. And you’re getting more senior or if you going down in this way, you’re getting more junior. And seniority, when you talk about a companies capital structure is just, you know what if there is anything left who gets their money first.

And even within the death, you’ll have different layers of death. And they told there might be different death holders who have different levels of seniority. So this one might be called senior secured death, senior means they are high up on the stock. That they are one of the first people to get their money and secure means that there is actually some collateral on the asset side that they get if the company can’t pay. So maybe this is like a piece of land, right. So just in kind of our everyday personal finance world and you more get is actually that secured death. It secured by the collateral of your home. If you can’t pay the death, the bank comes and takes your home for closes on the property. So that’s what secured means, it means that there are some collateral. And in the event of a bankruptcy, this guy can immediately go and get the collateral that his death is secured by.

So this a considered a very senior former death, senior secured then you might have here you might have of senior unsecured. And there’s lot of words around you. You know, senior, junior subordinate on all of that but this is get that there is just a hierarchy here. And some people are the first people to get the money and then whatever it might left goes. So this person that if there’s any money left to goes to this person and then if there’s anything left it goes to this person. And once you are in bankruptcy could it does tend to be in a negotiation between the different, you can almost view on buckets of death. And we will do more complicated example on the future on that that will actually deal into the details of bankruptcy. But this is general notion that the senior guys got made whole first then the more junior guy’s gets whatever is left and so on and so forth. And if there’s no money for the equity, there’s no money for the equity and that make sense, right. Because the death holders, you know, that all of they were getting their off side which is just to interest, right. So there also that you should get limited downside and even to things that turn bad.

Equity holders, they can have taken gambles and things were great. They will get all of the upside and now that thing is turn bad and they take a lot of the downside. And they are actually lucky that they don’t owe money. That’s actually that I guess you could call it the beauty of a corporate structure. That you have limited liability and sometimes in history this people would actually owe the difference. And they would actually owe these extra million dollars that they can and did argue with death that are in prison in all of that could it will talk more about in the future.

So anyway, just going back on the different trenches of death or buckets of death, so we could call this senior unsecured and that means that they are still senior. And they still fairly high off the seniority lather but they are unsecured. There is no particular asset that they can go run but as long as there is enough for them, don’t get it. So let me put some numbers here. So let say there was, I don’t, 1 million of senior secured and let say there is 2 million of senior unsecured and let say that this is 2 million of subordinated. Subordinated just means are not senior unsecured. So in this real time, what we have is bankruptcies were they liquidate all of the stuff and then they will handle out in the order of seniority. These guys get the million dollars back, so they made it whole. And then probably we charge a lower interest rate because they didn’t perceive the risk that high to begin with.

And this guys, right here the senior unsecured, it will get the next 2 million and then there is $1 million left, right. And that $1 million will go to this subordinated death. So they will get 50% of their money back. So they talk a little bit of hit but that’s okay because one this were good and they probably get high interest to compensate them for the risk. And usually as you get more and more junior and you take on more risk that you get more upside or more interest. And then in this case the equity holders get nothing and they get wipe out. So it just goes to zero, so that’s the answer to the question I said who get the money, well it’s the death holders get first and if there was actually $7 million instead of $5 million then you would have paid. So if this was $7 and you would have paid the $6 off completely and now the equity holders would have got $1 million. And the death would have got something if there was enough money that they handled to them.

Anyway in the next video I’ll cover, this was liquidation or we just say this in worth running and let just give it all away or let sell it and give it back to our creditors. To the next video I’ll talk about reorganization or we say, hey, you know what this business is a good business. So it just has two many liabilities and see you to the next video.

Transcription by: Scribe4you Transcription Services