Welcome back to Talking Law with David Dorer. In this episode I want to discuss bankruptcy as a business move and not just something for broke people to do.
Bankruptcy is a common strategy for corporations and individuals whom are insolvent, even though the Bankruptcy Code does not mention the word “insolvency” at all. Insolvency in every other legal context is the point at which the liabilities (the money you owe) exceeds your assets (the stuff you have). By that definition, if you owe money on your car, on your house, for student loans, and you don’t have a trust fund somewhere, you’re probably insolvent.
What is the difference between being “insolvent” and being “bankrupt”? Insolvency is a way to determine how your books work out: “are you right side up, or upside down?” Comparatively, “bankruptcy” is a legal declaration that you cannot afford your bills as they come due or that your liabilities so exceed your assets that you cannot afford to keep going the way you have been, and you declare that you are bankrupt so that the court can grant you equitable relief and impose a permanent injunction on your creditors’ ability to collect certain kinds of debts. Insolvency is something we all are or were at some point. Bankruptcy is something you “declare.”
So how is it a business move? Companies like Hostess, American Airlines, Delta, and General Motors all know that the Bankruptcy Code provides huge benefits to debtors. For example, a secured claim (where money is owed and the failure to pay the money means the creditor can take a piece of property. Think of a car note, a mortgage for you, think airplanes and pieces of machinery for these companies) is reduced to the fair market value of the securing collateral for these companies. This means if they are under water on a piece of property, they can pay merely what the property is worth, not what they owe.
Also, in debt reorganization plans (Chapter 9, 11,12, and 13) the debtor works out a plan where they pay back the amounts they owe on their secured debts and pay little to no money on their unsecured debts (this type of debt is usually a floating line of credit. Think of credit cards or medical bills). This type of structure means the debtor ends up with a much easier time managing his/her/its debts and can restructure how they do business to be more efficient, and ultimately could wind up making record profits.
Think about this strategy in your own life. While President Bush’s Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it more difficult to pay only what you owe on your house, a good lawyer could always help you get your affairs in order and help you pay only what is necessary for an effective reorganization if Bankruptcy is an appropriate business strategy for you.
Make sure to subscribe on iTunes, listen on Stitcher. I will be taking a break from The David Dorer Show this Friday in honor of a much needed vacation and in honor of July 4th, America, and showing those British Who’s the Boss. Tony Danza, That’s who.