Friday, February 13, 2009

Bankruptcies, business vs individuals

Have you noticed how many companies are lining up to file for bankruptcy lately? It seems that in many cases, the failure of these businesses was the result of making bad investment decisions and taking on way too much debt. This debt was assumed for a variety of different reasons but in most cases, it was taken on to buy other businesses or expand their own.

These companies bought into the concept that the economy would just keep expanding and that the value of their investments would continue to grow. Sounds an awful lot like the same reasons under which the average consumer loaded up on cheap credit over the past decade to buy new homes, cars and other consumer goods.

Here's the big difference: when a big business makes poor investment decisions and takes on too much debt, they can file for bankruptcy protection, reduce their outstanding debt and, as a result, become more competitive. All this is done with the help of outside financing to fund the costs associated with the bankruptcy filling. If a company can't pay their current bills, how can they secure more debt? Good question!

After a company files for bankruptcy protection, they'll usually continue to operate and do business as usual. There's little stigma associated with a business filing for bankruptcy and suppliers are usually eager to return to doing business as usual with the bankrupt entity.

If you are a consumer however, the rules appear to be much more unfavorable. You certainly can't really borrow money to cover the cost of hiring an attorney to represent you. A judge decides what debts you must repay and which can be eliminated (you can't negotiate directly with your creditors as companies can) and your credit standing is destroyed for years to come. Forget about getting loans or credit for seven to ten years as punishment for your bad past credit behavior.

Not so for companies. In fact, if you're big enough, the government will actually step in and provide capital to keep you in business. The source of that capital is taxpayer money. Hummmmm! Let's take a look at that: company makes bad decisions and gets rewarded by being allowed to restructure their debt and collect taxpayer money as life goes on as usual. Consumer files for bankruptcy and immediately becomes a deadbeat, a bad risk, an irresponsible consumer.

Businesses shun bad consumers while consumers continue to do business with bad companies??

Here's my take: If consumers are going to be saddled with the negative implications of filing for bankruptcy, so should businesses. Consumers should avoid doing business with bankrupt companies and refrain from buying their products. Don't support a company that's in bankruptcy. It's the only way to express your outrage at their irresponsible past behavior.

The average consumer is always on the receiving end of rules that make their lives more miserable after a bankruptcy filing while businesses continue to operate with impunity after their filing. The very executives that led these companies into catastrophic failure are rewarded by receiving big salaries and bonuses and, worse, are typically allowed to remain in charge? How is that possible. The very people responsible for bad decisions, get a second (and sometimes a third and fourth chance) to get it right. Not so for the average consumer that must lose everything before starting over again under the most difficult of circumstances.

In many cases, the individual's bankruptcy is caused by the failure of his employer to make sound financial decisions in the first place, leading to a loss of their job.

Bankruptcy laws must change again (our Congress made bankruptcy more difficult for consumers several years ago at the insistence of big credit card issuing banks) to remove the stigma associated with this action and to make it easier for individuals to get out from under their debt burdens, just like businesses can and to make a faster and simpler fresh start.

That's my outrage of the day. What do you think?

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