We have updated our Terms of Use.
Please read our new Privacy Statement before continuing.

Another chapter

17 October 2016 By Lorenzo Marinuzzi and Jennifer Marines

Bankruptcy is getting a bad rap this election season. No matter which presidential candidate you support, it’s important to get the story straight about companies that find themselves unable to pay their debts. At its core, the process is a powerful business tool for relief, and not, in many cases, a badge of professional failure.

In the case of the multiple corporate bankruptcies of Donald Trump, failure is how his opponent Hillary Clinton is portraying them. News organizations, too, have spun a similar story. “Trump’s Many Business Failures Explained,” Newsweek wrote. “The Bankruptcies: Top 10 Donald Trump Failures,” Time exclaimed. These stories, and many others, however, erode any potential gray areas from the lens through which bankruptcy ought to be seen.

Clinton at least opened the door for a less black-and-white discussion of the subject during the first debate. “You’ve taken business bankruptcy six times,” she said. “There are a lot of great business people that have never taken bankruptcy once.” Despite the attempt at an unimpeachable slight, her criticism actually invites nuance.

There may be many great business people who have never had to file for bankruptcy once, but there are also many who have, even multiple times.

Trump’s insolvencies and Clinton’s comments about them are a good opportunity to explore how bankruptcy can be effectively used for progress, restructuring and the greater good, and not, as is often implied in the case of the Republican White House wannabe, as a means to some selfish or nefarious end.

To fully assess Trump’s capabilities as a real-estate mogul would require scrutiny of more than just his six bankruptcy filings. More broadly, however, unforeseeable forces beyond the control of any competent business owner often leave him or her little choice but to use a legal and carefully crafted process to improve chances of long-term survival and prosperity.

Consider the case of roofing and insulation company Johns-Manville, for example. Started in 1858, it found itself with a serious problem by 1929. Most of its products were manufactured using asbestos, and employees were starting to be diagnosed with lung disease. Over the following 50 years, Johns-Manville faced an onslaught of personal and class-action lawsuits, with claims ultimately tallying into the hundreds of thousands.

Unable to keep up with the mounting allegations, the company filed for Chapter 11 bankruptcy protection in 1982, making it the largest company at the time to have done so. The case ultimately was resolved by the formation of the Manville Trust to ensure payment of asbestos tort claimants in an orderly manner. The trust still operates to this day.

Natural disasters such as Hurricane Matthew also can send business owners seeking bankruptcy protection. Two studies found strong correlations. One from Harvard Law School said that in the three years following a hurricane, bankruptcy filings in states that suffered a direct hit were about 50 percent higher than in ones that didn’t. Another out of University of Nevada, Las Vegas discovered that the average federal relief payment was not enough to make up for the damage done in places such as North Carolina and Texas, and spurred more bankruptcies there.

Just as natural disasters come largely without notice, economic downturns and industrial collapses often hit without much, if any, warning.

In 2009, with the United States in the throes of a recession, Chinese developers went on a building spree, buying up the world’s steel reserves in the process and sending prices skyrocketing. American contractors and suppliers couldn’t keep up. This unexpected market shift meant bankruptcy was the best option for many of them.

Five of Trump’s six business bankruptcies resulted from the turmoil in the gaming industry and its slow demise. In other words, while excessive borrowing can make bankruptcy more likely, global market forces beyond anyone’s long-term vision or control also are often a big contributing factor in upending seemingly sound business endeavors.

When used wisely and effectively, bankruptcy brings order to chaos. It allows institutions to survive, victims to be compensated, disaster survivors to rebuild and jobs to be saved. There’s no shame in utilizing the tools provided by the U.S. Bankruptcy Code. When stability, industries or economies collapse, bankruptcy laws allow companies big and small to regroup, rise up and keep fighting.

 

Email a friend

Please complete the form below.

Required fields *

*
*
*

(Separate multiple email addresses with commas)