Why Chapter 11? The Answer Has Always Been Jobs

In these days where we are all wondering which industry giant will be the next to file Chapter 11, and perhaps feeling a little schadenfreude about some of those names, it may occur to you to wonder why Chapter 11 even exists.

After all, why does the government sponsor (and spend a lot of taxpayer money) to allow businesses to avoid the consequences of bad decisions, mismanagement, or even just bad luck or timing, get out of their contractural obligations, and continue to operate while they are doing it.

The answer: preserving jobs.

There was a time in this country where no corporate reorganization bankruptcy existed.  If a business could not meet its contractual obligations, or persuade its creditors to modify those obligations, it was forced to liquidate.

That is still the model in some countries today.  And even in other countries which have a rough equivalent of Chapter 11, the options are more limited, and management is much more constrained.  The problem with that model is that it is inefficient.  The business is forced to shut down.  Assets may be sold in place, and the business might even re-open in the same location.

Why not keep it open while the business restructures?  A business is always more valuable as a going concern that the sum of its assets.  In today’s economy in this country, the value of the business may lie primarily in the employees–their expertise, their collective knowledge and experience, their ideas.

The free-wheeling reorganization available in Chapter 11 is designed to preserve jobs and the value of the business as a going concern.  Sometimes the free-wheeling nature of Chapter 11 is a negative–for example, when it leave ineffective management in place too long.  But that is often its strength as well, allowing those with the expertise and emotional investment in a business to continue to work towards a successful future.

No one, from the waitress working for tips to the CEO of a auto-industry behemoth, wants to file bankruptcy.  But be grateful that Chapter 11 offers the option of reorganizing while operating to those who need it.  The consequences in today’s market of anything else is almost unthinkable.