Running head: "Using Discriminate Analysis and other models to Predict Bankruptcy."
["Using Discriminate Analysis and other models to Predict Bankruptcy.”] [Simone Williams]
March 3, 2011
Abstract This paper will cover the history of bankruptcy and the many different stages of bankruptcy and how it is used to bail out companies and individuals. I will also discuss Using Discriminate Analysis and other models to Predict Bankruptcy in the business world by showing the different predictions models that were used in the past and some that are used in the days business world.
Bankruptcy has been around for a long time and can be dated back to the Ancient Greece days but it was handled in a different way. There was even a form of bankruptcy in the Old Testament days. I will cover the history of bankruptcy and the Discriminate Analysis and other models to Predict Bankruptcy. The word bankruptcy is defined as a settlement of the accountabilities of a person or organization that are unable to meet their financial obligation. A person or organization can either work out payment plan or their debt can be discharge through one of the bankruptcy chapters. Our bankruptcy is handled by federal law here in the United States United and was adopted in 1898. There were several amendments handled by the Chandler Act (1938) and the Bankruptcy Reform Act (1978). Back in the Ancient Greece day there was no bankruptcy in place. If a family owed a debt they were put into debt slavery. One of the laws put in place were that a family could only be in debt slavery for 5 years. But on occasion some people that owed were keep in slave for a lifetime and used as servants. Back in the Old Testament days they had a Mosaic Law were on the 7th year you were released from then debts that you owed if you were a citizen. They also had the 7th Sabbatical Year known as the Year of Jubilee which was the year citizens, foreigner and slaves alike were released of all debt. In today’s times we are released from our debt on our records after 7 years and 10 years if we have a bankruptcy issued on our reports. There are many different types of bankruptcy that is available to individuals as well as companies that are facing financial difficulties. The one type of bankruptcy for an individual is chapter 7, this type is where the consumer has decided that he or she can no longer handle the debt that they have incurred and decided that they will give up sole possession of their home or car. One cannot keep their possession that they are paying notes to monthly. After an individual file for chapter 7 and they return the items that are required to be returned to the owners, after a brief period of time they will be released from all debt owed and their credit will be clear. The chapter 7 bankruptcy will remain on their credit for 10 years. A consumer can also file a chapter 13 bankruptcy where the individual will say they want to work out a payment plan with their creditors to pay their debt over time. With chapter 13 the individual can keep possession of his or her property such as the home and car, by making monthly payment plans to the bankruptcy court. The court will require all debt that is owed form the consumer and their creditors have the right to agree to be a part of the bankruptcy procedures or they can decline and request a hearing. Companies generally file a chapter 11 when they have decided that the company no longer can endure anymore debt and need to be federally bailed out by the bankruptcy court. By filing chapter 11 the companies can still remain open but just like chapter 13, they will be making payments to their debtors. There are other bankruptcies such as chapter 9 which covers municipal bankruptcy. Chapter 12 which covers rehabilitation for family farmers and fishermen. Chapter...
References: 1. Altman, Edward I., "Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy". Journal of Finance, (September 1968): pp. 589-609.
2. Botheras, Donald A., "Use of a Business Failure Prediction Model for Evaluating Potential and Existing Credit Risk". Unpublished M.B.A. Research Project, Simon Fraser University, March, 1979.
3. C.A. - Score, A Warning System for Small Business Failures, Bilanas (June 1987): pp. 29-31.
4. Fulmer, John G. Jr., Moon, James E., Gavin, Thomas A., Erwin, Michael J., "A Bankruptcy Classification Model For Small Firms". Journal of Commercial Bank Lending (July 1984): pp. 25-37.
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