Corporate Bankruptcy and the Bailout Plan: What It Means For Us
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Corporate Bankruptcy and the Bailout Plan-What It Means to The Rest of Us


Recipe for disaster: In a large pot, add a heaping cup of corporate greed, a pound of irresponsible business practices. Let it simmer for a few years, then sprinkle in the American and global economic crisis, and you'll find yourself with a nice batch of busted companies.

To those who watch the nightly news, Corporate America appears to be crashing at an alarming rate.

Many Americans are facing their own financial crisis as they watch their investments wither and are facing layoffs, reduced benefits and higher costs of living. It's become a struggle for many Americans to have their gas tank filled and their fridge stocked.

When families face financial troubles, they buckle up their bootstraps, count pennies, reduce their spending and cut "luxury" costs.

But many businesses haven't followed this commonsense approach-and that's one reason why corporate failings have soared.

While many companies have decided to file bankruptcy in attempt to get back on financial track; others on Wall Street have gotten an seemingly "free pass" from the U.S. government (taxpayers) through the bailout plan.

In this article, we'll examine corporate bankruptcy filings, the impact it's had on the American people and the potential pros and cons of the bailout plan.

Corporate Bankruptcy Filings 2008

Many corporations that file bankruptcy are victims of the economic times. The American Bankruptcy Institute reports that in the six-month period ending June 30, 2008, business bankruptcy filings were up 42.1 percent from the same time a year ago.

Those companies didn't get a bailout from the U.S. government to stay afloat.

Here's just a quick snapshot of some of the companies that sought bankruptcy protection so far this year:

  • Sharper Image, a high-tech gadget store filed Chapter 11 bankruptcy protection and closed half of its stores;
  • Linens & Things, a bedding and home-furnishing retailer, filed for Chapter 11 bankruptcy protection and closed 120 stores;
  • Hard Rock Park, a theme park in Myrtle Beach, SC, filed bankruptcy and shut down for the rest of the season because of "frozen credit markets"; and
  • Bennigan's, the restaurant chain, filed for Chapter 7 bankruptcy and closed all of its company-owned restaurants.

Also, below are a few examples of some of the financial institutions that didn't get federal help and wound up filing bankruptcy in 2008:

  • Lehman Brothers, the fourth-largest U.S. investment bank, filed for Chapter 11 bankruptcy;
  • Washington Mutual, Inc. filed for Chapter 11 bankruptcy protection, listing $8.1 billion owed to creditors; and
  • IndyMac Bancorp, the seventh largest mortgage originator in the United States, filed for Chapter 7 bankruptcy.

Corporate Bankruptcy's Tie to Personal Bankruptcy

These bankrupt companies had employees that were laid off. Those employees had families and bills to pay. As a result, many sought Chapter 7 bankruptcy as a way to get out of debt or Chapter 13 bankruptcy that set them on a 3-5 year repayment plan to keep their homes.

Personal bankruptcy filings have risen dramatically-and the bankrupting of Corporate America certainly plays a part in this spike.

The American Bankruptcy Institute reports that in the first six months of 2008, bankruptcy filings by individuals or households with consumer debt increased 28.8 percent from the same time last year.

As you can see, many American companies and Americans have turned to bankruptcy to seek financial relief. But after the passage of the government bailout plan in early October, most of Wall Street got that relief without having to file bankruptcy.

The Bailout: Wall Street Avoids Filing Bankruptcy

At a time when so much of the American public is financially suffering, it's hard for some to view the Wall Street financial bailout as being fair.

The bailout can be even harder to swallow for those who have been following the news that has reported of widespread reckless practices and unregulated greed.

As with any business plan, there are pros and cons. Below are examples of how the bailout plan could help and hurt the American people.

A Bailout Pro

Part of the bailout plan was intended to help struggling Americans because if more financial institutions were to fail, there would be an even-tighter credit crunch.

A stricter credit crunch doesn't just affect people who are looking to purchase a car or home; this affects American businesses too-and it trickles down fast to the public.

For example, because of payment timing, many companies have to get loans to cover payroll expenses. If a company can't get a loan, then the employees aren't paid.

A Bailout Con

The troubled American economy, which has been fluctuating between stagnant and plummeting, isn't the sole reason why the bailout plan was needed; perilous Wall Street practices have a big part in why banks were on the verge of collapse.

A New York Times article recently discussed the problem of conflicts of interest in Wall Street firms' research, which contributed to Wall Street's decline. It also touched on the problem of brokerage firms' common practice of dealing hot initial public offerings to preferred clients.

The practice of naked short-selling (the illegal practice of short selling shares that haven't been determined to even exist) has also hurt the economy, according to a recent Forbes article.

Those are just some of the risky practices that have been going on for years on Wall Street.

Because of this, some people are skeptical that this bailout will even make a difference.

The bailout plan could be paralleled with the story of the kid stealing a cookie from the cookie jar, getting caught, but then let off the hook by grandma and allowed to eat the cookie. The question is: does the child really learn that stealing sweets is bad if he gets to reap the rewards?

News just broke about AIG spending $440,000 on a weekend spa retreat for the company's top performers, according to a Chicago Tribune article. This comes after the U.S. taxpayers gave AIG $85 billion in bailout money. And the Federal Reserve even announced that it would help the company further.

Unbelievable, huh?

If Wall Street doesn't learn its lesson from this financial disaster, then the American economy could be in further danger.

For the time being, we'll have to wait to see how this bailout plan shapes out. Stay tuned to Total Bankruptcy for the developments.

If established corporations can't pay the bills in these tough economic times, how are Americans supposed to make the ends meet? When you have overwhelming bills, sometimes it can feel like you're just spinning your wheels in debt.

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