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Bankruptcy Filings Spell Doom for Businesses

Published 11/19/08 Dustin Ensinger - Print Article
E-mail - editor@economyincisis.org

Corporate bankruptcies were once seen as an opportunity for companies to readjust business models and save jobs in the process. Now businesses filing for bankruptcy are being placed in an increasingly precarious situation as uncertainty surrounds the availability of credit.

Typically with Chapter 11 bankruptcies, companies can easily obtain financing to reorganize. With the credit market frozen-up, investors are seldom willing to take risks on struggling businesses.

More often than not, bankruptcy means wholesale liquidation of assets.

Linens ‘n Things and Lehman Brothers are already going through that process of liquidating and it seems as though Circuit City and possibly General Motors are not far behind.

In the past bankruptcy filings were thought of as a minor hiccup, today they are a deadly disease to be avoided at all costs.

“True reorganizations, in the spirit of the bankruptcy code, are becoming extremely rare,” said Sandra E. Mayerson, a lawyer at Holland & Knight in New York.

Instead, she said, many companies file for bankruptcy protection and proceed immediately to liquidation.

The inability of companies to restructure during a bankruptcy proceeding and in turn save much needed jobs could have an extremely detrimental effect on an already battered economy.

“It just further amplifies the recessionary spiral,” said Stephen F. Cooper, a restructuring expert who is advising companies trying to stay out of bankruptcy. “It will certainly have an impact on the employment — or unemployment — outlook and it will certainly have an impact on consumer spending.”

Source The New York Times:

Harsh as it is, a bankruptcy filing has always offered a glimmer of hope for a business hobbled by debt or a downturn. A company could slim down, negotiate manageable payments to workers and suppliers and keep going, preserving jobs.

But the credit crisis has trampled on that dream. More companies that file for bankruptcy protection are shutting down, lawyers say, because they cannot obtain enough financing to operate while they reorganize.

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