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>Debt is wiped out after liquidation. Nope. I get the feeling you don't know the difference between chapter 7 and chapter 11? >An LBO that should never have h

• gridlockd 7y ago
  > I get the feeling you don't know the difference between chapter 7 and chapter 11? Same here. Chapter 11 doesn't "wipe out debt", that's what Chapter 7 does. Chapter 7 implies liquidation. Chapter 11 may reduce debt obligations, entail partial liquidation, and so on. It doesn't just wipe out the debt. > Why? Because of the moral hazard. If I can just get a loan for an LBO to buy a company and squeeze it out like lemon, that's highly destructive. Unlike when issuing a junk bond, I have no real interest in the companies long-term survival. I guess you can make an argument that debt-financed stock buybacks have similar issues, but that's a topic for another day. In the short term, even a bad LBO looks good for both the bank and the PE firm. Meanwhile, the company has a debt burden that paid for nothing but the privilege of having been bought out, likely requiring them to charge higher prices, which is a strong competitive disadvantage. This leads the whole argument of "restructuring companies to be more efficient" ad absurdum.