As much as it pains me to say, Donald Trump was doubly right about filing bankruptcy.
He loudly announced at the debate that he had never filed bankruptcy.
And, he’d only taken advantage of our laws in filing.
Now, he was contemptuous of his creditors and dismissive about what the filings said about his business judgment.
Neither attitude was very appealing. But his basics were correct.
Corporate bankruptcy isn’t personal
One, when a company files bankruptcy, it is not a bankruptcy filing by the shareholder.
Even when the company bears your name. Trump Casinos may file bankruptcy, but that isn’t a bankruptcy of The Donald.
The shareholder’s interest in the company may become worthless, but the shareholder’s other assets aren’t involved.
When a corporation files a Chapter 11, it attempts to reorganize. Since the interests of owners are subordinate to claims of credits, the existing shareholders are often wiped out, or greatly diluted.
Creditors get to vote on the plan of reorganization and assess whether they are better served taking less than they are owed through the plan than liquidating the company.
A corporate bankruptcy emphasizes that the corporation is a separate legal person from its owners. The corporation can fail without necessarily bringing down the shareholders.
Our laws promote bankruptcy reorganization
The American approach to risk taking and financial distress enables recovery or reset.
New York Times writer Tom Friedman counts generous bankruptcy laws as one of the drivers of American enterprise. One failure in business doesn’t blight an entrepreneur’s life for all time. Bankruptcy allows for a fresh start.
Bankruptcy and the availability of a discharge of one’s debts allows for troubled entities to make a deal with their creditors to live on. Chapter 7 liquidation cases allow individuals to get forgiveness of most debts in exchange for the surrender of non essential assets.
Debt doesn’t have to cloud lives forever. People aren’t driven into the underground economy by debts they can never pay.
And the possibility of bankruptcy is built into the cost of credit. The interest rate reflects the lender’s perception of the possibility that the borrower will never pay.
Trump companies doubtless borrowed money at a price that calculated the risk of nonpayment.
So, I give the man, grudgingly, points for accuracy.
Style points are an entirely different matter.
Read on:
Protecting a business from the owner’s debts
Separating the business from the businessman
Image courtesy of Gage Skidmore and Wikimedia
