Bankruptcy

Revisiting the 2005 Amendments When Times Get Hard

By Elizabeth Warren

As a follow up to my earlier post about the forces that have made bankruptcy less workable for reorganizations, I note a new Businessweek article.  Retailers are feeling the pain of reduced consumer spending and tough credit terms, and now they are discovering that the 2005 bankruptcy amendments will make it harder--or impossible--for some of them to reorganize.

In an article entitled, When Chapter 11 is the End of the Story, reporters have started interviewing failing retailers who are facing new hurdles because of the changes in the law. The conclusion?  Companies that might have reorganized before 2005 may now be pushed into liquidation.

Bobby's comment on the earlier piece is right on point: bankruptcy laws will determine who bears the losses.  But that's the problem with many of the amendments.  Special interest lobbying means that one group gets favored over another, with no real policy justification.  Worse yet, in some cases, companies that could reorganize if all the creditors shared the hit will be forced to liquidate. 

Creditors want their money, of course.  But giving creditors so much power that businesses that could have been reorganized will end up liquidating makes no business sense for anyone.

Congress was enthusiastic about dismantling some key Chapter 11 protections in boom times.  When those amendments are tested in hard times, they seem much less attractive.

Full post as published by Credit Slips on September 03, 2008 (boomark / email).