By Jim McCarthy Aug 21, 2012 0 comments

Bankruptcy: The Killer Cure

Thomas Cott used the subject line of his daily email today to ask the question “Is bankruptcy the answer for arts money woes?” His collection of stories in today’s email are, as always, fascinating and diverse.

But since none of them is a direct answer to the question, I thought I’d take it on.  I’m not an attorney or an expert on bankruptcy, but both from almost two decades of experience in business, I feel my answer to this question is worth your consideration.

Bankruptcy is designed to make it possible for  “to relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes” as articulated by Supreme Court decision.  The idea is to have an orderly process in place so that businesses can be reorganized and given a chance to survive, and simultaneously to recognize the rights of those they owe.  The creditors might get little or nothing of what they’re owed, but the court will decide in an orderly process, with an eye to as much fairness as can be achieved, what they are entitled to.  This is helpful because without it, businesses would have every incentive to “skip town” on debts (metaphorically at least) and creditors would have incentives to use aggressive and unusual practices to get their money.

In other words, having it settled rationally in court means everybody can at least feel heard, knowing there was due process.

But in my view, this process is akin to chemotherapy.  The cure is almost as bad as the disease and might kill the patient first.   Many organizations don’t survive bankruptcy, and even if they do, they may not last long after that. Because other than the removal of debt, the fundamental business model realities don’t necessarily change:

Bankruptcy does nothing to earn more revenue or fans for a business.

It doesn’t necessarily change the cost structure of the business in the long term.

And it doesn’t make management any more competent to adjust the organization to the needs and wants of the future or to provide good financial stewardship.

It just pushes the reset button on your debts; puts a black mark next to your name, and, let’s not forget, really steams the buns of the people you owed money to before.  They’re the ones who are essentially funding an organization’s ‘fresh start.” If an organization has just essentially shirked, sorry, discharged through bankruptcy, a major debt to an organization or entity that it will need in the future, it seems hard to envision that organization or entity giving it any resources again.

Of course, bankruptcy, like anything, can be handled elegantly or inelegantly, and I’m sure some organizations do a good job making peace with their debtors, even coming to a semblance of consensus about the need for bankruptcy.

But an “answer” to money woes?

Only the most woeful.

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