Legal Definitions - statement of affairs

A Statement of Affairs, sometimes also referred to as a Statement of Financial Affairs, is a specialized financial document prepared when a business or individual is facing severe financial distress, typically when insolvency or bankruptcy is imminent. Unlike a standard balance sheet that records assets at their original cost or ongoing market value, a Statement of Affairs estimates the immediate cash value that assets would likely fetch if they had to be sold off quickly (liquidated) to pay creditors.

It provides a realistic picture of the entity's financial position in a worst-case scenario, detailing all assets, their estimated realizable values, and all liabilities, to determine how much money would be available to repay debts if the entity were to cease operations.

• Example 1: Small Business Facing Bankruptcy

  A local bakery, "The Daily Loaf," has been struggling for months due to rising ingredient costs and declining customer traffic. The owner realizes they can no longer pay their suppliers, rent, or employee wages on time. They consult a bankruptcy attorney to explore their options.

  Illustration: The attorney requests a Statement of Affairs. This document will list all of "The Daily Loaf's" assets, such as the ovens, display cases, mixers, and remaining inventory, not at what they originally cost, but at their estimated quick-sale value if the bakery had to close immediately. It will also detail all outstanding debts to suppliers, the landlord, and the bank. This helps the attorney and the owner understand the true financial position and the likely outcome of a potential liquidation or bankruptcy filing.

• Example 2: Individual Debtor in Personal Bankruptcy

  Sarah, an individual, has accumulated significant credit card debt and medical bills after an unexpected illness and job loss. She finds herself unable to make even minimum payments and decides to file for personal bankruptcy.

  Illustration: As part of the bankruptcy filing process, Sarah must submit a Statement of Affairs. This document requires her to list all her assets—such as her car, any equity in her home, bank account balances, and significant personal belongings—at their estimated quick-sale value. She must also detail all her liabilities, including credit card debts, mortgage, and medical bills. This comprehensive report helps the bankruptcy court and her creditors understand her financial situation and what assets might be available to repay her debts.

• Example 3: Large Corporation in Administration

  A large manufacturing company, "Global Widgets Inc.," has lost several major contracts and is unable to service its substantial corporate loans. Its primary lenders decide to appoint an administrator to manage the company's affairs and attempt to recover their investments.

  Illustration: One of the administrator's first critical tasks is to prepare a Statement of Affairs for Global Widgets Inc. This involves valuing the company's factories, specialized machinery, intellectual property, and raw material inventory at their immediate realizable value if they were to be sold off quickly, rather than their book value or going-concern value. This detailed financial snapshot informs the administrator's strategy for asset sales, potential restructuring, and the order in which different classes of creditors (e.g., secured lenders, unsecured suppliers, employees) might be repaid.