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There is nothing stupid with Chapter 11. The owners get nothing until all creditors are made full, so the incentives work just as well as under alternative regi

There is nothing stupid with Chapter 11. The owners get nothing until all creditors are made full, so the incentives work just as well as under alternative regimes. The difference is simply that there is a chance for the business to continue. Which is really better for all involved, creditors, employees, customers, and vendors. The alternative alternative, i. e. starting from the assumption that business must shut down, is really a legacy of the times when a business and its owners were hard to separate. There may also be some sort of misplaced morality at play, where „Radio Shack must die“ to atone for the sin of running out of money.

Animats 8y ago
The owners get nothing until all creditors are made full The stockholders get nothing. The management, though, can do quite well for themselves in a Chapter 11 reorganization.
- Godel_unicode 8y ago
  Your explanation and the quote you are explaining mean the same thing.
  - adrianratnapala 8y ago
    No it they don't, because they make different predictions about incentives. Allowing the business to operate in bankruptcy cam, under certain conditions, give managers to incentives to drive the business into bankruptcy. For better or for worse, that makes the incentives different from alternative systems.
fauigerzigerk 8y ago
>Which is really better for all involved Not for better managed competitors.
- shaki-dora 8y ago
  Well, as part of the reorganization, the company needs to find new capital. If they are deemed badly managed, and any new plans aren’t convincing, they will have a hard time doing so and will disappear. It’s really like a startup rising from the ruins of the previous attempt.
  - AngryData 8y ago
    I think the old business will have a far easier time managing to secure capital and loans than a new entrepreneur, which is a boon for the guys already with money and being paid big bucks to administrate, but pretty horrible for the small guy that has newer and better ideas.
- rhino369 8y ago
  Who aren't parties to the bankruptcy, so who cares? The public benefits from increased competition.
  - fauigerzigerk 8y ago
    I'm not against Chapter 11, but whether or not the public benefits depends on the specifics of the case. Sometimes unproductive companies are kept in business for far too long because there is political pressure. In the long run, it's not good for anyone if workers remain in unproductive jobs instead of moving on. It depresses salaries, erodes skills and saddles the financial system with debt of questionable quality. But Chapter 11 is certainly not a prerequisite for that. I think most zombie companies that are being kept alive never enter anything like Chapter 11. So I think Chapter 11 is good and necessary to avoid the sudden death of companies worth restructuring.
AngryData 8y ago
What about the contractors that get regularly screwed over from this? "Sorry, I know we agreed to pay for your time and work, but we declared bankruptcy and paid off most of the bank's debt and nothing is left for you small fry! Good luck sueing us with your non-existant legal team! I just got a bonus for fucking you over and saving the company the money!"
- CamperBob2 8y ago
  If the company goes away entirely, the contractors and suppliers are even more hosed. Example would be the US auto industry. Whether through bailouts or traditional bankruptcy proceedings, it was considered vital that the businesses themselves remain operational to keep their supply chains intact.
- roel_v 8y ago
  'Chapter 11' is not really bankruptcy. Well it is in the US legal sense, but it's not really in the common use sense of the word.
- pault 8y ago
  I worked for a small design agency that got stiffed on a six figure invoice this way. There was absolutely nothing they could do about it and the bankrupt founder didn't even bother apologizing. It almost killed a 10 person company that the studio head had spent a decade building up from a sole proprietorship.
  - nradov 8y ago
    The design agency shouldn't have extended so much credit in the first place.
- all_blue_chucks 8y ago
  If you sign a contract you assume counterparty risk. Don't sign contracts with companies that have garbage credit ratings. Or if you do, get money up front.
  - 8y ago

Animats 8y ago

The owners get nothing until all creditors are made full The stockholders get nothing. The management, though, can do quite well for themselves in a Chapter 11 reorganization.

Godel_unicode 8y ago
Your explanation and the quote you are explaining mean the same thing.
- adrianratnapala 8y ago
  No it they don't, because they make different predictions about incentives. Allowing the business to operate in bankruptcy cam, under certain conditions, give managers to incentives to drive the business into bankruptcy. For better or for worse, that makes the incentives different from alternative systems.

fauigerzigerk 8y ago

>Which is really better for all involved Not for better managed competitors.

shaki-dora 8y ago
Well, as part of the reorganization, the company needs to find new capital. If they are deemed badly managed, and any new plans aren’t convincing, they will have a hard time doing so and will disappear. It’s really like a startup rising from the ruins of the previous attempt.
- AngryData 8y ago
  I think the old business will have a far easier time managing to secure capital and loans than a new entrepreneur, which is a boon for the guys already with money and being paid big bucks to administrate, but pretty horrible for the small guy that has newer and better ideas.
rhino369 8y ago
Who aren't parties to the bankruptcy, so who cares? The public benefits from increased competition.
- fauigerzigerk 8y ago
  I'm not against Chapter 11, but whether or not the public benefits depends on the specifics of the case. Sometimes unproductive companies are kept in business for far too long because there is political pressure. In the long run, it's not good for anyone if workers remain in unproductive jobs instead of moving on. It depresses salaries, erodes skills and saddles the financial system with debt of questionable quality. But Chapter 11 is certainly not a prerequisite for that. I think most zombie companies that are being kept alive never enter anything like Chapter 11. So I think Chapter 11 is good and necessary to avoid the sudden death of companies worth restructuring.

AngryData 8y ago

What about the contractors that get regularly screwed over from this? "Sorry, I know we agreed to pay for your time and work, but we declared bankruptcy and paid off most of the bank's debt and nothing is left for you small fry! Good luck sueing us with your non-existant legal team! I just got a bonus for fucking you over and saving the company the money!"

CamperBob2 8y ago
If the company goes away entirely, the contractors and suppliers are even more hosed. Example would be the US auto industry. Whether through bailouts or traditional bankruptcy proceedings, it was considered vital that the businesses themselves remain operational to keep their supply chains intact.
roel_v 8y ago
'Chapter 11' is not really bankruptcy. Well it is in the US legal sense, but it's not really in the common use sense of the word.
pault 8y ago
I worked for a small design agency that got stiffed on a six figure invoice this way. There was absolutely nothing they could do about it and the bankrupt founder didn't even bother apologizing. It almost killed a 10 person company that the studio head had spent a decade building up from a sole proprietorship.
- nradov 8y ago
  The design agency shouldn't have extended so much credit in the first place.
all_blue_chucks 8y ago
If you sign a contract you assume counterparty risk. Don't sign contracts with companies that have garbage credit ratings. Or if you do, get money up front.
- 8y ago