NCPA - National Center for Policy Analysis

Benefits of U.S. Corporate Bankruptcy Laws

October 30, 2002

Our bankruptcy policies are designed to allow financially troubled firms to clean up their operations and survive. Rather than imposing a death sentence, they give firms a second chance -- thereby benefiting employees, shareholders, debt holders, other firms doing business with them, and consumers of their products and services, experts point out.

A number of large U.S. corporations have survived bankruptcy and come away from it strengthened: Continental Airlines, Texaco and the Southland Corporation, to cite a few.

Bankruptcy is often viewed as a cataclysmic, end-of-the-world event. But here are some of the reasons that view is outdated:

  • Debts are not brushed aside, but rescheduled; contracts are renegotiated and unprofitable divisions sold or terminated.
  • Without bankruptcy laws, companies with cash-flow problems might have to shut their doors immediately and all their jobs would vanish.
  • Even if a bankruptcy reorganization fails, Chapter 11 creates an opportunity for an orderly liquidation.
  • Some of our European trading partners contend that the ability of American firms to reorganize gives them an "unfair trading advantage" -- but that may be out of envy of our system, observers say.

And some domestic politicians talk about corporate bankruptcy as if it's some sort of financial scam, a gimmick perpetrated by malevolent corporations to avoid paying their bills. Some politicians on the campaign trail use high-profile bankruptcies as an excuse to blame the Bush administration for mismanaging the economy. This may make good political theater, observers say, but it's economic nonsense.

Source: Daniel Mitchell (Heritage Foundation), "Two Cheers for Bankruptcy," Washington Times, October 30, 2002.


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