Sunday, February 26, 2012

Essay on Bankruptcy

Essay on Bankruptcy

Lately in the financial media there have more and more announcements about bankruptcies of companies all over the world. One of such examples I found in The Economist issue from November 22nd in the article called “The End of the Affair.” The American household-goods chain Linens ‘n Things filed for bankruptcy protection in May 2008. Later, in October, the company still could not find a buyer and had to liquidate itself.

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Among other things, the article also discusses the main reason why this and many other American companies are going out of business – credit crisis that is dragging the U.S. and together with them the rest of the world into very deep recession. In the last decades the economic slow-downs were quite mild mainly because the consumer spending was more or less stable, which in turn was possible due to the numerous ways to borrow money. Debbie Jeffries from Linens ‘n Things says that some of the customers had up to 15 credit cards and adds: “Maybe that’s why we are here.”

Since 1985, consumer personal savings were steadily declining and debt increasing tremendously. People were spending more and more. Now the period of great spending seems to be over. Stock markets and house values have dropped and consumers spending decrease. These negative financial factors are driving out of business many companies all over the world. The firms that go out of business lay off workers, who after loosing job might not be able to pay their bills and also file for bankruptcy. All these will possibly lead to a longer and deeper recession.

Business Law Today: The Essentials textbook describes the purpose of the bankruptcy law in the United States. The law has two main goals – to help a debtor to have a new start without creditors’ claims, and to provide equal rights to all creditors of a party that goes bankrupt.

When Linens ‘n Things have filed for bankruptcy, all the proceedings were held in federal bankruptcy court. The Bankruptcy Code specifies 5 different ways for defaulting debtors to seek help. The article in The Economist does not provide details, however, from the mentioned information, we can assume that in May 2008 Linens ‘n Things has filed for Chapter 11 bankruptcy, which means reorganization. The firm most probably could not find investors and proposals for restructuring and in October 2008 had to file for Chapter 7 bankruptcy, which means liquidation. In such case, a company sells all its nonexempt assets and distributes profit to the creditors. That is exactly what Linens ‘n Things is doing at the moment. Not a company itself, but a trustee (a government official) sells the assets and then distributes the received profit to the creditors. Linens ‘n Things has filed voluntary petition in bankruptcy to court. According to the law, in 180-day period before this, the company had to receive a credit counseling from an “approved nonprofit agency.”

According to the law, individuals, partnerships and corporations can file for Chapter 7 bankruptcy. Even though it became more difficult to file for bankruptcy after new legislation of 2005, unfortunately, due to the worsening economic situation, there are chances that we will hear about bankruptcies more and more often in the coming months. 
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