Chapter 11 bankruptcy has received a lot of discussion of late. From General Motors to Chrysler to even Six Flags amusement parks, corporate reorganization has been the talk of Wall Street. Most of the conversation has been about the impact on jobs, cars, stock markets and CEO pay.
Unfortunately, a lot of this news fails to educate the general consumer about the benefits and nuances of bankruptcy. So let's use all these corporate restructurings as examples to discuss how Chapter 11 bankruptcy has changed and what it means to come out of it successfully.
At one time, a Chapter 11 plan was successful if the company eliminated superfluous debt, lessened overhead (salaries, employee count) and had specific steps in place to strengthen its revenue. The new definition deals more with liquidating assets, such as subsidiaries and disparate business plans that may not be in step with the company's original core competencies and product lines. This is mainly a result of corporate growth trends in the last couple of decades. More and more companies became global, acquiring several companies to help them diversify and in turn, taking on more debt, more employees and a longer balance sheet.
A lot of this new approach to Chapter 11 has to do with lenders wanting quicker return on what is owed. Instead of a lengthy, strategic process about what is best to streamline and where layoffs should be focused, debt holders apply pressure to sell assets and raise capital. Chrysler for example, didn't aim to be a smaller, more nimble version of "Chrysler" again. They just simply sold the majority of the business assets to another car maker. In this case, Italy's Fiat.
Chrysler was in and out in 42 days, which is an exceptionally short amount of time, considering a typical Chapter 11 takes about 18 months. Still, experts believe that number is a little misleading because Fiat purchased only the strongest assets and that a portion of Chrysler is still in bankruptcy. The "old" part of the company will continue to operate and find ways to satisfy creditors.
The term "successful" in relation to corporate restructurings under Chapter 11 is relative. Jobs are always lost, shareholders get stung and operations collapse. This new approach to handling it makes it a priority to salvage the best components so somewhere along the line, there is a silver lining for a segment of the people and organizations involved.
Another factor that can determine Chapter 11 success is the company's market position upon emergence. How well are they positioned into whatever economy they'll be facing? Today's conditions are not overly conducive to becoming profitable right away. The fear is that a company, while operating under very tenuous conditions, would have to file again. Industry jargon calls that a "Chapter 22."
Like personal bankruptcy, Chapter 11 is designed to help corporations realign their interests, trim excess operational fat and come back out swinging. In the age of global conglomerates and disparate product channels, it's becoming a entirely new process. If you are giving some thought to leveraging the benefits of bankruptcy for yourself or a small business, it helps to track what's going on elsewhere and of course, to read through this blog. There is a lot to learn and in this blink-fast economy, things change in a hurry.