Why Businesses that Declare Bankruptcy Don’t Always Die


Professor Richard Squire was quoted in a Vox article about the idea of corporate bankruptcy in the United States.

Bankruptcy leaves the impression of utter failure, and when a company goes bankrupt, it’s easy to assume that it’s dead, may it rest in peace. According to this line of thinking, here’s an alarming tidbit: If you regularly travel by plane, there’s a decent chance you’ve flown with an airline that was bankrupt at the time. United filed for bankruptcy in 2002, followed by Delta in 2005 and American Airlines in 2011.

Since 2017, we’ve seen a wave of once-powerful retailers going the same route, like Sears, Mattress Firm, the clothing brand BCBG, and the accessories chain Claire’s.

The idea of corporate bankruptcy as a reset button is an American invention dating to the 19th century, says Fordham law professor Richard Squire. A boom in the railroad industry had led to over-building, and with too many railroads, some inevitably failed. But these businesses still had value, having invested heavily in laying down rails and building engines and cars. People realized that the cash generated by liquidating these assets — selling them off piece by piece — wouldn’t be as great as the gains from letting the railroads continue to operate.
“It didn’t make sense to shut them down, or you would destroy a lot of economic value,” says Squire.

Reorganization in bankruptcy has also become an American export, says Squire, having been picked up in some form by the UK, Italy, Germany, and Singapore, among others. Under American law, the same managers who drove the company into bankruptcy are allowed to continue operating the business, which some observers initially saw as “hiring the fox to guard the hen house.”

“There was a lot of skepticism in the rest of the world about the reorganization process,” says Squire. “But over time jurisdictions increasingly recognized that they were shutting down valuable businesses. If you liquidate a business, everyone loses their jobs. The employees all get fired, suppliers now have nobody to work with. They realized that bankruptcy the way [it was traditionally done]is very disruptive, so maybe we could try something like the American system.”

The system that Squire described, one in which a company can restructure via Chapter 11 bankruptcy protection, isn’t a realistic option for many retailers today. That’s in part due to the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), a 2005 amendment to the US Bankruptcy Code.

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