Bankruptcy Law in United States a Welcome Release for Some Companies

Bankruptcy code in the United States is different from any other country. In the US, when a company such as Kodak or Hostess files for chapter 11 bankruptcy, they are allowed to shed obligations and legal debts that they can’t pay in order to survive.

In other countries, firms that file for bankruptcy are forced to liquidate, or pay back loans over a long period of time. In England, when a company files for bankruptcy, the management is fired.

John Pottow, a law professor at University of Michigan, said “Chapter 11 in the United States is the darling of the international business world. If you are a company or even a rich person, you can go into the bankruptcy system and confront your failures, and you will not be punished.”

US bankruptcy law allows recent companies such as American Airlines and General Motors the hope of coming out of bankruptcy in better shape than before filing. The theory behind the law is that it ultimately saves more jobs and prevents creditors from losing too much money. There are still downsides, however.

Since personal bankruptcy law was tightened in 2005, individuals are finding it harder and harder to file for bankruptcies. Speaking on the issue, Pottow said “If you’re a consumer, they’ll nickel and dime you on your car payment and run you through a ringer for pennies. There’s a very different treatment between individuals and corporations.”

Bankruptcy allows corporations to void labor contracts, and be relieved of pension promises. Under Chapter 11, retirees in line for pensions are placed last in line to get paid, as unsecured creditors.

Chapter 11 filing is a popular tool used among businesses in many industries. Some companies have even used it more than once. Hostess has filed twice already, and Donald Trump’s casinos filed 3 times.

Personal bankruptcy still has a largely negative connotation, as does small business bankruptcy, but big businesses often don’t see the stigma any more. Possibly because they are better able to secure financing to help them survive during the bankruptcy proceedings.

When all is said and done though, the number of corporate bankruptcies in 2011 was down from 2010, according to the American Bankruptcy Institute.