Bankruptcy Benefits

Bankruptcy gives an individual or business a chance to start fresh by forgiving debts that just can't be paid while offering creditors a chance to get some amount of repayment based on what assets are available. In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons and businesses another chance and providing creditors with an amount of debt repayment. Bankruptcy filings in the United States can fall under one of several chapters of the Bankruptcy Code, such as Chapter 7, which involves liquidation of assets; Chapter 11, company or individual "reorganizations"; and Chapter 13, debt repayment with lowered debt covenants or payment plans. Bankruptcy filing specifications vary widely between different countries, leading to higher and lower filing rates depending on how easily a person or company can complete the process.

When a company is planning on walking away from billions in debt, it has no right to expect things to go smoothly. The largest power company in Texas is still pursuing a “prepackaged” bankruptcy.  A “prepackaged” bankruptcy is a plan for financial reorganization that a company prepares in cooperation with its creditors that will take effect once the company enters bankruptcy. This plan must be voted on by shareholders before the company files its petition for bankruptcy, and can result in shorter turnaround times. The idea behind a prepackaged bankruptcy plan is to shorten and simplify the bankruptcy process in order to save the company money in legal and accounting fees, as well as the amount of time spent in bankruptcy protection. The sooner the company can emerge from bankruptcy, the sooner it can implement its reorganization and return to generating revenues from its core operations. That type of restructuring usually costs less and finishes faster than a traditional Chapter 11 case and it often conforms to management’s vision. 

In 2013, 29 percent of the bankruptcy fillings by the public companies have been “prepackaged,” according to BankruptcyData.com. This share is almost two times as high as last year’s. The former TXU Corporation is in line now to become the largest bankruptcy, measured by its $40 billion in debt. Energy Future Holdings has many classes of creditors, and some face the prospect of losing 95 percent of their investments. They almost have nothing to lose by rejecting a deal or pushing to break up the company. Private equity firms are trying to salvage their reputation and some of their stakes, and hedge fund managers are trying to capitalize on a financial debacle. For some high-profile local cases, a bitter fight in bankruptcy court produced better returns for creditors and sometimes better prospects for employees.

Source: "Expect an EFH power fight" by Mitchell Schnurman, from Dallas Morning News. 9/22/13