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I don't think I understand the financial system of bankruptcy very well, I always thought that bankruptcy was a hard end of the line---your assets are seized an

by nscalf 7y ago

I don't think I understand the financial system of bankruptcy very well, I always thought that bankruptcy was a hard end of the line---your assets are seized and sold off to pay back debts, etc. I've also heard business cases while in school about companies like Kodak where bankruptcy seemed to be the end. Can someone explain how bankruptcy often results in companies continuing to run? Edit: Thanks for the responses everyone. I'll do a bit more reading on chapter 7 vs chapter 11, very interesting stuff.

howard941 7y ago
There are two types of bankruptcy: Liquidation and reorganization. This was a reorg.
gefh 7y ago
There are different types of bankruptcy. For businesses, chapter 11 bankruptcy allows time for court supervised restructuring of debt, on the theory that there is often value in an insolvent business, if the cash flow can be re-arranged.
siberianbear 7y ago
Bankruptcy can take two forms. The key question is, "if this company got out from under its debt and didn't have to service it, is it still a viable company?" If there is actually a viable business there, it makes sense to wipe out the shareholders, extinguish the debt, and make the former bondholders the new shareholders. If there is no viable business even with the debt, then liquidation is the right path. (I'm not a finance professional, just another person on the internet with an opinion.)
Spooky23 7y ago
At a high level, there are reorganization and liquidation type bankruptcies. Some companies get into trouble with debt, are victims of economic winds or otherwise get into trouble. But the business is fundamentally still viable. So the company declares chapter 11 bankruptcy, is able to break out of unsustainable contracts, and the suppliers take a haircut. Other companies are just done. So they declare chapter 7 bankruptcy, sell off anything of value, and pay out creditors based on the judge/bankruptcy trustees order.
bluGill 7y ago
The loan holders get their say in the bankruptcy process. In fact they have first say. It all comes down the the judge saying "hey banks, you will never get your money paid back, what option to get some of it back do you want us to take. Options are the company doesn't pay for a few months while they make some changes, and then continue paying off their loans, or the company is sold and the bank gets the proceeds of the sale - one common variation of the latter is the bank gets ownership of the company to run as they see fit. Again, the bank gets first say, though the company will make proposals, and the judge will force things. Of course in the real world it isn't one bank, it is hundreds of banks and bond holders each who want their say, and there are contracts saying what say each party has. The judge is just there it get all of them into court and come up with an agreement that as many can accept as possible. Sometimes that means the judge says to one bank you want X, but everyone else wants Y so you lose. Bankruptcy is common enough that judges (and any bank) understands how to deal with it and the rules are common.
blhack 7y ago
To answer your question in a very simple way: suppose sears goes bankrupt and the bank wants to sell off the assets of the company to recoup some of its loss. The name "sears" has a value and is something that can be sold.
rolltiide 7y ago
> I always thought that bankruptcy was a hard end of the line nope. only thing bankruptcy guarantees is that creditors are prevented from getting your assets and have to negotiate to see if there is anything they can get forces people to the table all at once to see what kind of possibilities there are
dv_dt 7y ago
Planet Money is great for introduction to a lot of economic concepts, including in this case, the idea bankruptcy leniency being an advantage for the economy. https://www.npr.org/sections/money/2015/09/05/437628996/episode-647-the-benefits-of-bankruptcy https://www.npr.org/sections/money/2015/09/05/437628996/epis... There are maybe more subtle areas of economics for which I don't fully agree with it's model of the world, but I still think it's a pretty good podcast for starting econ.

by nscalf 7y ago

howard941 7y ago

There are two types of bankruptcy: Liquidation and reorganization. This was a reorg.

gefh 7y ago

There are different types of bankruptcy. For businesses, chapter 11 bankruptcy allows time for court supervised restructuring of debt, on the theory that there is often value in an insolvent business, if the cash flow can be re-arranged.

siberianbear 7y ago

Bankruptcy can take two forms. The key question is, "if this company got out from under its debt and didn't have to service it, is it still a viable company?" If there is actually a viable business there, it makes sense to wipe out the shareholders, extinguish the debt, and make the former bondholders the new shareholders. If there is no viable business even with the debt, then liquidation is the right path. (I'm not a finance professional, just another person on the internet with an opinion.)

Spooky23 7y ago

At a high level, there are reorganization and liquidation type bankruptcies. Some companies get into trouble with debt, are victims of economic winds or otherwise get into trouble. But the business is fundamentally still viable. So the company declares chapter 11 bankruptcy, is able to break out of unsustainable contracts, and the suppliers take a haircut. Other companies are just done. So they declare chapter 7 bankruptcy, sell off anything of value, and pay out creditors based on the judge/bankruptcy trustees order.

bluGill 7y ago

The loan holders get their say in the bankruptcy process. In fact they have first say. It all comes down the the judge saying "hey banks, you will never get your money paid back, what option to get some of it back do you want us to take. Options are the company doesn't pay for a few months while they make some changes, and then continue paying off their loans, or the company is sold and the bank gets the proceeds of the sale - one common variation of the latter is the bank gets ownership of the company to run as they see fit. Again, the bank gets first say, though the company will make proposals, and the judge will force things. Of course in the real world it isn't one bank, it is hundreds of banks and bond holders each who want their say, and there are contracts saying what say each party has. The judge is just there it get all of them into court and come up with an agreement that as many can accept as possible. Sometimes that means the judge says to one bank you want X, but everyone else wants Y so you lose. Bankruptcy is common enough that judges (and any bank) understands how to deal with it and the rules are common.

blhack 7y ago

To answer your question in a very simple way: suppose sears goes bankrupt and the bank wants to sell off the assets of the company to recoup some of its loss. The name "sears" has a value and is something that can be sold.

rolltiide 7y ago

> I always thought that bankruptcy was a hard end of the line nope. only thing bankruptcy guarantees is that creditors are prevented from getting your assets and have to negotiate to see if there is anything they can get forces people to the table all at once to see what kind of possibilities there are

dv_dt 7y ago

Planet Money is great for introduction to a lot of economic concepts, including in this case, the idea bankruptcy leniency being an advantage for the economy. https://www.npr.org/sections/money/2015/09/05/437628996/episode-647-the-benefits-of-bankruptcy https://www.npr.org/sections/money/2015/09/05/437628996/epis... There are maybe more subtle areas of economics for which I don't fully agree with it's model of the world, but I still think it's a pretty good podcast for starting econ.