I don’t know much about bankruptcy, either, but I do know that when companies file Chapter 11, their creditors agree to accept as payment an amount far lower than what they are actually owed…
Absolutely incorrect.
The very purpose of Chapter 11 is to ensure that creditors get paid, either by the contniued operations of the debtor or by orderly liquidation.
In Chapter 11, it is possible that a creditor might be forced to take a “cram down” of the amount owed, but it is not the idea of it going in, and is usually not what happens.
There are priorities too. A secured creditor is not subject to a “cram down”, at least to the value of its security. Certain obligations, such as wages, have priority over general obligations.
Normally, what happens in a Chapter 11 is the same sort of thing that happens in a consumer Chapter 13. The debts are rescheduled so the debtor can actually pay them out of the anticipated cash flow. Usually the ones who are the most affected are the very short-term creditors, who could find their “due in six months” debt extended to full payment in five years.
Also, Chapter 11 can reorganize “preferences” of one creditor over another that might have been forced on a company as its condition grew more desperate before filing.
The very purpose of Chapter 11 (like Chapter 13) is to allow extension and payment of short term debt. And the Judge is charged with ensuring that happens if it’s possible. Bankruptcy judges do nothing else, and the know what they’re doing most of the time.
There is also something called the “absolute priority rule”. By it, the very last people paid are the company’s owners. The only way the owners can recover their stake is to make the company work again. Otherwise, everything goes to the creditors.
Now, if there was no Chapter 11, that’s exactly what would happen anyway, but far more certainly and much less effectively. A food fight by unrestrained creditors will almost never give full value to anyone other than the first in line.
But sometimes it’s true that liquidation is all there is. The assets are sold and the money divided among the creditors in priority order. That could be the fate of Peabody Coal and Arch Coal, for example, the two largest coal companies in the U.S… Obama promised he would bankrupt them, and did, and for no good reason except as prompted by his ideology. So, if they end up in total liquidation, others will end up buying their mines, equipment and contracts for whatever they will now bring. Since Obama’s “war on coal” is not over, he has practically guaranteed that those assets will be sold below their intrinsic value. Few companies can survive when the government decides to bankrupt them.
But that’s politics, I guess. The difference is that if the Trump companies were liquidated, Trump lost his investment because creditors have priority. Having no investment in coal, Obama lost nothing. Only those who depended on coal lost anything. In my state, that’s $1500 per household per year, and forever. In coal mining regions, it’s a lot more. A coal miner’s lifetime earnings would be well over a million dollars. Now it’s nothing.
