Written by Craig D. Robins, Esq
When a major corporation seeks bankruptcy protection, it helps our economy’s future
When I want to wax poetic, I tell my Long Island Chapter 11 business clients that bankruptcy is the lubrication that greases the gears of capitalism and enables our country’s businesses to grow for the benefit of society as a whole.
This is because bankruptcy enables entrepreneurs to take greater risks, knowing that if their business is not successful, our bankruptcy system may provide the necessary steam escape valve.
Coming to terms with a possible large auto company Chapter 11 bankruptcy
With the possible bankruptcies of General Motors and Chrysler very much in the news, a recent Wall Street Journal article provided some interesting commentary about large-scale corporate bankruptcy. It said that America is relearning an old economic lesson – – that business failures and bankruptcy are essential to capitalism.
Bankruptcy is an orderly way to give a financially overburdened debtor the opportunity for a fresh new start by deciding which creditors get paid back and which do not.
In good economic times, bankruptcy encourages risk-taking. After all, if everyone feared taking a calculated risk on a venture that might fail, there would be a very stagnant economy.
Today’s large corporate bankrutpcies are not unlike the railroad failures over a hundred years ago
The Journal article compared the problems faced by the 21st century big auto makers with those of the 19th century railroads. The roots of modern American business bankruptcy date to the bad times then, which may not be so unlike the bad economic times of today.
At the end of the 19th century, nearly 20 percent of the railroad track belonged to insolvent railroads. With state governments unable to deal with railroads that stretched beyond their borders, and Congress hamstrung by a narrow interpretation of the Constitution, creditors turned to courts. Judges fashioned an approach to divvy up assets among creditors that was codified in an 1898 law, the spirit of which survives today in our Bankruptcy Code.
Large bankruptcies may Help the Economy in the Longrun
Now we have General Motors and Chrysler. They cannot pay their debts; the only issue now is how, not whether, their creditors take a hit.
President Obama has expressed his preference that there be, in essence, a bailout. However, it is quite likely that a political solution may not work, and that there will be a major bankruptcy ahead. But, although taxpayers fear bankruptcy, it’s an essential part of a functioning capitalist economy. A major corporate bankruptcy may be the only way to prevent a corporation’s mistakes and past debts from hobbling the economy’s future.