Bankruptcy

What's a Poor (Corporate) Debtor to Do?

By Stephen Lubben

So Felix Salmon has joined SIGTARP in faulting Treasury for not considering the collateral effects of rejecting dealer contracts in the GM and Chrysler chapter 11 cases. Everyone seems to be missing the basic point that corporate debtors never consider the plight of their creditors.

Chapter 11 is often a brutal process for landlords, trade creditors, employees, and anyone else who has a relationship with the debtor. The sole aim is to maximize the value of the debtor. One obvious way to do that is to avoid all the bad deals management made prior to bankruptcy.

To have the debtor consider the effects of its actions on unemployment or the larger economy is to move beyond chapter 11 into fiscal policy. The Administration decided to run these cases like any other chapter 11 case. If they had done otherwise, I can just imagine the complaints about "interference" with the market.

Indeed, if you start down that road, there really is no point in filing chapter 11 at all. Rather, we're back to 1979.

Full post as published by Credit Slips on July 21, 2010 (boomark / email).