Bankruptcy, Not Bailouts
Bankruptcy, Not Bailouts By Mark Nestmann for Lew Rockwell
By the time you read this, Congress may be putting the finishing touches on a $1 trillion bailout to help America cope with the economic fallout from the COVID-19 pandemic.
As is customary in such matters, the “winners” in the bailout sweepstakes will be the best-connected corporations, who maintain the largest lobbying staffs in Washington, D.C. At the front of the line this time are domestic airlines and airline manufacturers, which are hemorrhaging billions of dollars each month the pandemic lasts.
But corporate bailouts aren’t the answer. Bankruptcy is.
Several types of bankruptcy exist. The one that’s most appropriate in this situation is Chapter 11, in which a company is reorganized in exchange for debt relief. It’s used for businesses that want to keep operating but need to restructure so they can pay their debts. Once a company files a Chapter 11 bankruptcy petition, creditors can’t sue to enforce their claims against it.
Instead, the company has four months to come up with a reorganization plan, which must be completed within 18 months.
Once the bankrupt company files its reorganization plan, creditors must approve it. Generally, creditors get ownership of some or all of the bankrupt company’s shares in exchange for some degree of debt relief.
For instance, American Airlines declared bankruptcy in 2011. Throughout the process, it promised to:
- Fly normal schedules
- Honor reservations, tickets, gift cards and vouchers, and make exchanges and refunds as usual
- Fully maintain frequent flyer and other customer service programs
- Provide employee wages, healthcare coverage, vacation and other benefits, without interruption
- Pay suppliers for goods and services received during the reorganization process.
By and large, American did exactly that during its reorganization. The airline’s biggest casualty was its pension plans, which were frozen for some categories of employees, including pilots. And existing shareholders: when the company emerged from bankruptcy, the old shares became worthless.