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Issue of Bankruptcy

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Since the late 1990â??s more than 25 domestic steel companies have filed for bankruptcy. A combination of low prices with strong competition by foreign competitors and so-called â??legacy costsâ? of unions are cited as the primary reason why so many steel companies. are filing for bankruptcy. In 2002, as Brownstown Steel Corp. was in the process of restructuring its loans to avoid bankruptcy, its lenders requested that the firm disclose full information about its revenues and costs. Explain why Brownstownâ??s management was reluctant to release this information to its lenders.

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Managerial Economics
Since the late 1990â??s more than 25 domestic steel companies have filed for bankruptcy. A combination of low prices with strong competition by foreign competitors and so-called â??legacy costsâ? of unions are cited as the primary reason why so many steel companies. are filing for bankruptcy. In 2002, as Brownstown Steel Corp. was in the process of restructuring its loans to avoid bankruptcy, its lenders requested that the firm disclose full information about its revenues and costs. Explain why Brownstownâ??s management was reluctant to release this information to its lenders.

Managerial Economics
Since the late 1990â??s more than 25 domestic steel companies have filed for bankruptcy. A combination of low prices with strong competition by foreign competitors and so-called â??legacy costsâ? of ...

Solution Summary

Bankruptcy Code is contemplated in this solution. References are also provided to further validate the findings.

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What are some of the reasons people file bankruptcy?

During the decade of the 1990s, business and personal bankruptcies soared. This happened in spite of the greatest economic boom in US history. It was also a boom time for lawyers specializing in the intricacies of bankruptcy law. In 1998, a record 1.4 million businesses and individuals filed for protection under the bankruptcy code, a 300 percent increase since 1980. Ninety-six percent of the filings were personal bankruptcies; however, in 1999, the number dropped 8.5 percent.

Many analysts attribute the high number of bankruptcies to aggressive credit offers by banks and, to a lesser extent, department stores. These companies lure even the most credit challenged (young people and those who have problems managing money) into accepting their credit cards, sometimes offering secured lines of credit, where the cardholder places as little as $100 in a savings account and receives a line of credit five times that amount.

Another reason cited by analysts for the increase is that the old stigma associated with bankruptcy-if you filed for bankruptcy protection, you were somehow inferior and to be looked down upon-no longer exists in most areas of the country. A third reason is a change in attitude of the credit cards issuers. Not long ago, if an individual filed for bankruptcy, that person was unable to obtain credit for years (a bankruptcy filing remains on your Credit Bureau file for 10 years). Today, however, credit card companies operate on a different premise. If you have recently filed for bankruptcy, you are no longer in debt. Therefore, you must have sufficient cash flow to service new debt. Within a month of filing, your mailbox will be flooded with credit card offers.

In the business arena, filing for bankruptcy-stopping creditors from taking legal action-has evolved into just another business strategy.

The three most common types of bankruptcy are:

Chapter 7: The bankrupt's assets are sold to pay creditors, and creditors have no right to the debtor's future earnings.

Chapter 11: A business continues to operate and creditors receive a portion of both current assets and future earnings. This form of bankruptcy is also available to wealthy individuals. (See Wards.com)

Chapter 13: For the typical consumer, where creditors usually receive a portion of the individual's current assets and future earnings.

Although bankruptcy laws are sometimes abused (an individual may file personal bankruptcy every seven years and some individuals do exactly that), bankruptcy is designed as a safety net for businesses or individuals who experience financial difficulties for whatever reason.

Questions:

1. Who may file Chapter 7 bankruptcy? How has this changed over the past year?
2. What are some of the reasons people file bankruptcy?
3. How does bankruptcy affect interest rates on loans? Credit cards?

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