Chapter 11 reorganization transfers risk to the willing

Jeffrey Miron opines that instead of accepting a bailout, banks facing failure should opt for bankruptcy filing instead:

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

Further, Chapter 11 passes restructuring risk to willing participants – those motivated and capable of adding new value to the business, whether it be capital, brainpower, or in most cases both. As banks go, I am not sure who understands the credit derivatives transaction chain well enough to take on such contingencies (but I’m am certain they exist), and court-supervised reorganization does allow for due diligence time if the entity can hold out (often assuming debtor-in-possession financing is available too, which could be questionable in this credit environment).

Outside of the banking crisis, Forbes notes it is never a bad idea to be prepared:

If you feel your business may be facing financial distress, meet with a work-out attorney now, before it is too late and your business becomes another statistic.

What Forbes doesn’t tell you is that once in Chapter 11, you’ll be faced with a myriad of financial and operational decisions that can become, to put it mildly, emotionally overwhelming. Add that in a reorganization you will be required to prove the business is worth more alive than dead, meaning get ready for a ton of strategy shifting and number crunching.

Editor’s Note: If you need someone who can stay alert during the trauma, priming objective decision making and spreadsheet mashing during trying times, contact me. I’m not only capable – I actually enjoy the stress. And I have plenty of references, both professional and personal, that can attest to the effectiveness of my candor and elbow grease.

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