Print   Close

From bankruptcy to laughing all the way to the bank

October 2, 2008

The news last fornight was dominated by this 10-letter word—bankruptcy. But all’s not lost even for the bankrupt—the economically bankrupt ones, at least. As these legends proved, bankruptcies may not be the end of the road, but the beginning of a new journey.

Milton Hershey
The Candy bar king declared bankruptcy not once or twice but four times in his life before getting the mix right.

Walt Disney
The iconic father of animation and the world’s most popular mice (Mickey and Minnie) filed for bankruptcy after one of his main clients went bust in 1920. The company: Iwerks-Disney Commercial Artists. This was, perhaps, an inspiration for one of Disney’s most enduring characters— Scrooge McDuck.

Henry John Heinz
This German-American’s business revolved around selling grated horseradish but it went bankrupt in 1975 due to an overproduction of the crop and the collapse of his bank. Undaunted, Heinz launched a new company with more products, including its ever popular Tomato Ketchup.

Donald Trump
This motor-mouth businessman with the famous hairstyle and lifestyle has filed for bankruptcy for his casino business twice— in 1992 and 2004. At one point in time, Trump’s personal debt was estimated to be in the region of $900 million and business debt at $3.5 billion. However, Forbes estimated Trump’s wealth in 2008 to be around $3 billion.

P. T. Barnum
The original Big B of showbiz, the world’s first show business millionaire’s self-stated goal “to put money in his own coffers” was not the easiest to achieve. Heavy real estate and other unwise financial investments saw Barnum declare bankruptcy. However, he bounced back with the bestselling “the greatest show on earth.”

Several other business legends got it wrong before they got it right. Charles Goodyear (the founder of Goodyear tyres) was clapped into jail several times for non-payment of debts, at times as little as $5. He died $200,000 in debt. But others were more fortunate. Examples, talk show host Larry King claimed bankruptcy in 1978; look where he is today. Even more encouraging, is the example of Ford Motors founder Henry Ford. His first venture, Detroit Automobile Company, went bankrupt in 1902, but he bounced back. And rest is history.

Bankruptcy in the US chapter & verse
  • Corporations, sole proprietorships and partnerships in danger of going undertake recourse to Chapter 11, a painful but planned option to stay in the business while keeping creditors at bay. To do this, the debtor corporation files a Chapter 11 petition with the local bankruptcy court.

  • The moment this is done, creditors are automatically prohibited from making any attempt to collect their debt, foreclose or repossess.

  • The debtor corporation also has to file various financial details and statements with the court, and then propose a repayment plan to the court.

  • The creditors are allowed to vote on the debtor’s proposal. It usually takes six months to a year for proposal to be cleared and a repayment schedule put in place.

  • No shortcuts here: the debtors usually have to clear their tax obligations and secured debt in full, along with interest, and a part of the unsecured debt. The debtor gets up to six years to clear the payments.

  • Corporations prefer Chapter 11 as it lets them run the show.

  • Chapter 7, on the other hand, is more ruthless: the company stops all operations and goes completely out of business. A trustee is appointed to sell the assets and the money is used to pay off the debts, which may include debts to creditors and investors.

  • Most publicly-held companies file under Chapter 11 rather than Chapter 7 because they can still run their business and control the bankruptcy process.

  • The bankruptcy arm of the US Justice Department appoints one or more committees to represent the interests of creditors and stockholders in working with the company to develop a reorganisation plan.

  • During bankruptcy, bondholders will stop receiving interest and principal payments, and stockholders will stop receiving dividends.

Sources: US Securities & Exchange Commission, US courts.

URL for this article :
@ Copyright 2019 India Today Group.