Understanding Bankruptcy Essay

1398 words - 6 pages

In an economy where there are financial ups and downs it is hard for companies to strategize a successful long lasting plan. There are many companies that have had great successes while others have had and lost. For those companies, a loss usually meant riding the wave to bankruptcy, a stigma which meant death in the financial world. Today, bankruptcy is sometimes used as a strategic move within the business world breaking free from financial burdens to start anew. This financial “get out of jail free card” has taken on a few changes over the years. Along with the history of bankruptcy there are different approaches or chapters with each method of filing, reasons for bankruptcy, and affects associated with both the debtor as well as the creditor.
Bankruptcy’s inception goes back to the Old Testament days in the Bible referencing Deuteronomy 15:1-2, “At the end of every seven years you must cancel debts this is how it is to be done. Every creditor shall cancel the loan he is made to his fellow Israelite. He shall not require payment from his brother, because the Lord’s time for cancelling debt has been proclaimed.” The purpose for bankruptcy was enacted by Congress through the court system to give people an opportunity to repay or wipe out their debts in order to get a “fresh start (How Did Bankruptcy Start?, 2011).” Following the proceedings, there would be a filling recorded against one’s credit report not to be removed until the end of seven years, the time frame sited in the Bible. There have been many changes in the U.S. Bankruptcy Code since its inception by Congress in 1800 from the protection of corporations in 1867 after the Civil War to the Bankruptcy Abuse Prevention and Consumer Protection Act signed into law in 2005 by George W. Busch (How Did Bankruptcy Start?, 2011). In times past bankruptcy has always carried with it a sense of shame and ridicule. It used to protect the creditors, but has since shifted over to protecting the debtor. Today it is sometimes used as a viable option for keeping one’s main assets or as a restructuring tool while disbanding commitments to creditors giving companies in financial distress a “fresh start.” Some companies have declared bankruptcy even though they were not considered to be insolvent (Ross, Westerfield, & Jordan, 2011). According to Weinstein (1992) publically traded company bankruptcies have not increased much since 1987, but their assets have increased from $41.5 billion in 1987 to $83.2 billion in 1991. As of 2013, corporate assets caught up in bankruptcy have dropped to an average of $42.6 billion (Chutchian, 2014).
When an organization has financial liabilities out weighting their assets then the company needs to negotiate with its creditors in a business workout (bankruptcy prevention) for a reasonable pay schedule or file for bankruptcy protection (Situazione, 2014). If a business workout cannot be arranged then the last resort is to file a petition for bankruptcy with...

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