Case Study I: All She Needs Is a Little Breathing Room When Debbie Dawson started her business 12 months ago, she estimated it would be profitable within 8 months. That is not what happened. During the first six months she lost $18,000 and during the next six months she lost an additional $14,000. Debbie believes the business is going to get better during the next six months and that she will be able to break even by the end of the second year. However, her creditors are not sure. Debbieâ€™s business owes the two largest creditors a total of $48,000. The others are owed a total of $38,000. Debbie believes that if she can postpone paying her creditors for a period of one year, her company will be strong enough to pay off all of its debts. On the other hand, if she has to pay the creditors now, she will be too weak financially to continue and will have to declare bankruptcy. â€œI really think itâ€™s in everyoneâ€™s best interest to give me 12 months of breathing room,â€ She explained to her husband, â€œIf they will do this, everyone is going to come out on top. Otherwise, we are all going to take a financial bath.â€ Debbie has considered broaching the subject with her two major creditors. However, she is not sure whether this suggestion would be accepted or would be used as a basis for their bringing legal action against her. â€œIf they think I am trying to stall them, they just might demand repayment immediately and force me into bankruptcy,â€ she explained to a close friend. â€œOf course, if they see things my way, thatâ€™s a different story. In any event, Iâ€™m reluctant to pursue this line of action without talking to my attorney.â€ Debbie hopes she and her lawyer, Juan, can work out a plan of action that will prevent her having to declare bankruptcy and liquidate the firm. During her phone call to set up a meeting with Juan, she commented, â€œIf everyone remains calm and looks the situation over very carefully, I think theyâ€™ll agree that my suggestion is a good one. After all, Iâ€™m not asking them to put any more money in the business, so the most they can lose is what they are owed currently. On the other hand, if they force my hand, theyâ€™ll probably be lucky to get 40 cents on the dollar. If they wait, they could end up with all of their money. All Iâ€™m asking for is a little breathing room.â€ Juan suggests they meet later this week to talk about it. â€œIâ€™m sure we can think of something,â€ he told her. 1. What type of bankruptcy agreement would you recommend? Why? In your answer be sure to compare at least two types of bankruptcy and the pros and cons of each. 2. Why would you not recommend the other types of bankruptcy in this particular situation? Please explain. What factors might change the bankruptcy method that you would recommend? 3. When selling the creditors on your recommendation, what argument(s) would you use? What impact does each type have on a creditor? Case Study II: Looking for Capital When Joyce and Phil Abrams opened their bookstore one year ago, they estimated it would take them six months to break even. Because they had gone into the venture with enough capital to keep them afloat for nine months, they were sure they would need no outside financing. However, sales have been slower than anticipated, and most of their funds now have been used to purchase inventory or meet monthly expenses. On the other hand, the store is doing better each month and the Abramses are convinced they will be able to turn a profit within six months. At present, Joyce and Phil want to secure additional financing. Specifically, they would like to raise $100,000 to expand their product line. The store currently focuses most heavily on how-to-do books and is developing a loyal customer following. However, this market is not large enough to carry the business. The Abramses feel that if t
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