Saturday, June 6, 2009

What is Bankruptcy Chaper 11?

On June 1st, General Motors filed for bankruptcy.

They filed for voluntary chapter 11 bankruptcy protection. I am sure many of us have seen these this in many articles in recent months. But what exactly are is it?

Chapter 11

The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership ( Wikipedia).

This is different from
the normal kind of bankruptcy that we know, i.e company closes down and sell all its assets. This kind of bankruptcy code can be found in Chapter 7.

Chapter 11 allows the company to continue running, even though its bankrupt. But of course under the 'care' of the court. It also allows them to continue getting refinancing and money from from different sources (but usually the company have to give some assurance to the money lenders like first priority to business earnings etc.) Its like giving the company a 2nd chance to reorganize itself, and hopefully pull through.

In the process, there will also be this 'automatic stay' clause that states that no debtor to stop collecting money from this bankrupted company. (So good! Bankrupt already can still borrow $$)

Frankly, after reading up more on chapter 11, I personally find that this law a little crappy (no offense, just that I can't think of politically correct word to use) I mean if a company fails, does it seriously deserve a second chance? By giving them a second chance, you are being unfair to the other companies who are doing well. What incentives do companies then have to work hard?

I can understand the reason for saving such big companies (because a lot of people depends on them for their jobs!)..but in the world out there, sometimes its inevitable. By 'rewarding' the bad, there is no point being good. Its like finding a quick way out but creating more problems in the future.

Looking at all these recently Chapter 11 cases, I really feel that USA is going to have bigger problems in the future with their businesses. There is really no more incentive to do things right because there is always a safety net, but at the expense of the tax payers money.

1 comment:

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