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Does Bankruptcy Define Your Business?

Trump and Today’s America

Part of the Trump Brand has come about from a success story that has arisen due to being able to overcome being bankrupt.  Trump turned around and transformed the brand of a Reality TV show series by the name of, “The Apprentice,”  to eventually triumph from TV into becoming the President of the United States of America.  Did his bankruptcy define his business? Most likely not.  A story emerged, one of a businessman transition to the leadership of a country.

The Decision to File

Of course, filing a bankruptcy is a huge decision.  Sometimes the trigger can be circumstances beyond control.  Even in today’s age, there may still be a stigma applied, as some view it as a moral failure.  As it stands and within a year, we have seen corporate bankruptcies at their highest point.

When a company files for a Chapter 11 bankruptcy, it seeks protection from creditors in trying to restructure debt.  The judge oversees this.  Effectively, it transfers the ownership of the company from shareholders to the creditors.  For the most part, shareholders are the ones that suffer the greatest loss.  Creditors are normally made whole.

What is at Stake?

The tax scheme makes allowances when creditors and shareholders of failing companies write off losses.  In 2018, the new tax law adds uncertainties, but shareholders and creditors knew that losses incurred in 2018 would face the new corporate tax rate of 21%, and so the government would only pick up 21% of the losses.

What about the Shareholders?

The shareholders are also entitled to a portion of the liquidated assets.  That factor is dependent on which shares were held and how liquid the assets that were left over.  In cases where stocks become of no value, shareholders are unable to sell those shares.  Money in those cases is only derived from liquidated assets, where available.

The usual order of repayment is the government, financial institutions, other creditors bondholders, preferred shareholders, and common shareholders. The stock classification is what determines a residual claim on assets.  The amount of receipt of payment is in direct proportion to the ownership level of interest. That is why preferred shares have an increased chance of payment receipt, as they have a higher stake in assets. 

New Beginnings

The aim is to give the company the ability to make a comeback.  It is the US Constitution, which gives Congress the authority to establish “uniform laws on the subject of bankruptcy throughout the United States under Article 1, Section 8, Clause 4. The “founding fathers” envisioned and provided for a way to help people get out of mismanaged debt.  Overall, bankruptcy is good for the economy and always for a fresh start.

How does Tax Season Get Affected?

The general trend is that bankruptcy filings tend to be seasonal, with the highest filings being closest to tax season.

Overall, bankruptcy allows for more liquidity and discharge from debt.  As more and more people begin to entertain entrepreneurship, the chances for bankruptcy also become greater.  Shareholders are normally the first ones affected which is why the type of interest that they hold does matter.  Learning from past mistakes of mismanagement always makes for a great American success story.

https://www.businessinsider.com/chapter-11-bankruptcies-are-up-63-from-a-year-ago-2018-4

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