Given the state of the economy over the past couple of years, it’s no wonder that so many companies and individuals have found themselves growing more and more familiar with the ins and outs of bankruptcy protection. Unfortunately, the term “bankruptcy” tends to come with a bit of a negative connotation on both a corporate and personal front. For larger companies, bankruptcy tends to come as the result of upper level mismanagement. Though in recent years, it has also been linked to funding abuse and blatant fraud. And for individuals, the word “bankruptcy” might conjure up assumptions of frivolous overspending and poor financial planning.
Although it’s fairly easy to pass judgment on a person or company when bankruptcy is part of the picture, in some cases, a person or small business owner could wind up in bankruptcy through no fault of his own. In fact, it is often the case that bankruptcy comes not as the result of laziness or improper management, but as part of a chain reaction following a larger bankruptcy.
Stephen Graves of San Antonio’s Graves Law Firm is a bankruptcy lawyer with more than 20 years of experience under his belt, and he has seen numerous instances where a large corporate bankruptcy has resulted in multiple smaller bankruptcies almost instantaneously. When a large company files for Chapter 11, it immediately receives protection under the U.S. bankruptcy code that allows it to cease payments on outstanding debts until a plan of reorganization can be worked out. What happens during this time is that creditors – many of whom are individuals and small business owners – don’t get paid for their goods or services until the plan of reorganization is approved and set into motion. Additionally, just because a bankrupt company gets a plan of reorganization approved doesn’t mean that it will be able to fully make good on all of its debts. In some cases, a creditor in a bankruptcy might only receive half of what he was originally owed, or even less. Therefore, as a result of the bankruptcy process, many individuals and small business owners tend to find themselves unable to recover from the substantial loss of income inherent in either the poor treatment of their claims, or the lapsed time between when they should have been paid and when they eventually might get paid - and so the vicious cycle of bankruptcy-causing bankruptcies begins.
In fact, part of the reason why bankrupt corporations have gotten such a bad name for themselves over the past number of years is that in many cases, it was truly “the little guys” – the unpaid contractors and small business owners - who ended up suffering tremendously, not the company executives or shareholders in question. Of course, it’s easy enough to see how a single bankruptcy might impact so many others. If a smaller company signs a contract with a large corporation to provide it with services, thereby relying on said company as its single biggest customer, then it’s bound to find itself in dire financial straits when its greatest source of income suddenly goes kaput. Additionally, since large bankruptcies can result in layoffs, it only makes sense that some individual bankruptcies might arise as an unfortunate side effect.
The worst thing about large-scale bankruptcies is that not much can be done to protect individual employees, contractors, and small business owners from the potential reality of being forced into their own filings as part of the chain reaction. Sure, one can try diversifying his client base so as not to put all of his money-filled eggs in a single basket, but that strategy can only go far under certain circumstances. Additionally, while perhaps a small business owner could be a bit more vigilant by keeping tabs on his larger clients’ finances, most employees do not have the luxury of working multiple full-time jobs simultaneously in order to hedge their bets.
Unfortunately, there really is no solution to this particular problem, as doing away with bankruptcy protection on a whole would simply cause a different kind of chaos. On the bright side, at least those who make their livings in the bankruptcy field will have a fair amount of business to look forward to should such recent economic patterns continue.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.
