Using small words, what exactly happens when a company or person files for bankruptcy?
I keep reading about people and companies filing for bankruptcy these days. Particularly GM and Chrysler. What exactly happens when someone files for bankruptcy? People say that it’s something you want to avoid if at all possible, but I’ve also heard Bush say that it’s a good thing for the auto companies to do in order to reorganize their companies. Now I’m no Bush fan but there’s got to be SOME substance to what he said (maybe?) as his economic advisers are saying this is a good idea. Why does Bush say this is a good idea while many other leaders say it’s a bad idea?
I’ve also read comments from "regular" people who say that the Big Three should be left to go bankrupt and clean up their own mess. But that this would cause tons of people to lose their jobs.
I’ve looked up the dictionary definition of bankruptcy as well as the wiki page and I’m still confused. I need someone to give me a very simple explanation about what bankruptcy is and what is going on right now in the US. Please help me understand this!
There are three major types. For personal, there are Chapter 13 and Chapter 7. Chapter 13 is the structured variety, overseen by a bankruptcy trustee, an attorney appointed by the court. It structures your debt, allowing you to keep certain assets and continue to pay for them, and to repay a percentage of other debt while wiping out a percentage of that debt.
Chapter 7 is total liquidation and is the extreme measure. You don’t get to keep your house or your car, and all debt (except tax levies and certain types of student loans) is wiped out. You start over.
In business, Chapter 11 is the restructuring form of bankruptcy that Bush and others are talking about. It gives the company some protection against creditors, allowing them to continue operations and receive supplies and materials needed for manufacturing or sales. It is overseen by the courts.It can, in some cases, invalidate certain contracts, including union contracts and the obligations created by them. This is why the UAW is so dead-set against the Big Three filing. It’s probably the wisest thing they can do at this point.
Chapter 7 liquidation applies to the corporate world as well. Any and all assets are sold and the creditors receive a portion of what they are owed, as determined by the court. The company is history at that point – though the name can also be considered an asset and can be bought and used by another business.
July 24th, 2010 at 7:01 pmBankruptcy is a complicated affair. Lots of attorneys, accountants, trustees, etc. make their livings from this area of the law. Basically, bankruptcy is what happens when a person or company can’t or won’t pay their bills when they are due. When this happens, either the creditor or the debtor can request protection from the situation.
There are different reasons for this to happen. Sometimes the debtor has assets but they are tied up; e.g., waiting to collect from another debtor, their wealth is in capital assets, etc. Sometimes, the debtor simply has nothing that could be sold or liquidated to pay debts.
People and companies can be different. generally, if a corporation or S corp wants to stay open, they file for reorganization (chapter 11.) Basically, it allows the corporation to stay in business, but it allows them to stiff the people they owe money to and it allows them to get out of their existing contracts. By stiffing their creditors, I mean they take what money they can afford (as determined by a bankruptcy court) and distributes that money amongst those parties (usually as a percentage of each liability.) If they don’t have the ability to stay in business (usually they’ve already filed ch. 11 already,) they can file for complete liquidation of the business (ch 7.) When they liquidate, they sell everything or exchange it or whatever. Then they parcel out those receipts to the creditors, government, and employees, depending on different priorities.
People have a slightly different route. They can file for reorganization initially under chapter 13. Basically, they pay their creditors a percentage of what they owe and then go on with their lives. They can also file complete bankruptcy under chapter 7.
There are special chapters for farmers, fishermen, cities, etc.
July 24th, 2010 at 7:01 pmpeople are able to handle a certain amount of debt in their lives. Even someone who makes $10,000 a year can makes payments on $1,000 in credit card debt. But at some point the debt grows too large. There is no chance of paying. The debtor is at a crisis point. She would have to borrow more in order to pay back the money she already owes.
July 24th, 2010 at 7:01 pmThe law allows you to wipe the slate clean and start over with no debt. It doesn’t seem fair to the people who loaned her money. But she will also suffer because the bankruptcy will warn everyone in the future that she is not good at managing her money.
GM and Chrysler and Ford are in the same position. They have borrowed too much. And now they are trying to borrow more in order to pay back the previous loans. They might need a bankruptcy to wipe out the debts.