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 But here are some of the reasons that view is outdated: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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