Silver Lining under the Bankruptcy Cloud

The word “bankruptcy” bears negative connotations. Death knell is near company's business can no longer generate sufficient cash to cover expenses. Bankruptcy filings do sometimes bring ruinous consequences for the insolvent parties.

For individuals, filing for bankruptcy may absolve them from some financial obligations, but the stigma resulting from personal bankruptcy remains with that person for life. Furthermore, employment prospects for the bankrupted are somewhat limited too. Therefore, not many emerge from the legal rigmarole of bankruptcy proceedings a winner.

But why filing for bankruptcy remains a chosen alternative for both individuals and business organizations, many of them are well established companies?

For many unfortunate people, dismal job markets and collapsing housing prices leave them with little option but declaring bankruptcy. Bankruptcy enabled them to walk away from an oversize mortgage and/or exorbitant medical bills.

But there is another ball of wax for corporations who have volunteered to be bankrupted. Chapter 11 of the country’s bankruptcy codes has become a savior to many well-known companies and their hard-working employees. Remember a landmark case between Texaco, Inc., and Pennzoil, Co., in the 80s? After the court favored Pennzoil with a multi-billion-dollar damage award against Texaco, the latter sought protection from the insightful laws to fend off this humongous award.

In other more mundane cases, resulting from certain accounting principles, as times go by, a company’s financial position can be overburdened with its future liabilities in pension and health benefits owing to their many employees.

Under Chapter 11, the company operates its business as usual except no creditors are being repaid while the trustee of the proceedings is sorting out as well as reorganizing the company’s financial obligations. To keep the business going, within the laws, the bankrupted and its trustee may cancel pre-existing business and labor contracts. At the end of the day, many creditors must take a “hair cut” on the money they are owed. Once all stakeholders in the process agree upon the terms and conditions of a reorganization plan, the company can then emerge from the bankruptcy protection with a lighter debt load. So it can carry on its business as usual in a competitive market place but at lesser costs. - Ayee