A corporation which files bankruptcy is considered to be proactively using a strategic business tool. But a human being who files bankruptcy is considered to be irresponsibly breaking promises to creditors.
Let’s see if this difference in attitude makes sense using the example of the bankruptcy filing of American Airlines in late November.
Selecting just a very few characteristics of the American Airlines Chapter 11 “reorganization,” here’s how they compare to a consumer Chapter 13 “adjustment of debts”:
1. Reason for filing: As I said in my last blog, at the time of its bankruptcy filing the airline had no immediate financial reason for filing. But it had a mediation hearing scheduled in early December in its drawn-out negotiations with its pilots union. The Chapter 11 filing canceled that mediation and gives management much more leverage against its employees, especially its pilots, who would be hurt the most by American defaulting on its pensions.
In digging a little deeper since my last blog, there in fact WAS a financial deadline that the November 29 filing clearly intended to beat. American had financed an engineering and maintenance center in its Fort Worth, Texas headquarters in the early 1990s, and related to that was obligated to pay close to $50 million in unsecured municipal bonds on December 1. Those bonds lost most of their value with the bankruptcy filing. Who are the bondholders thatwho got hurt? New York Life was a major holder of these bonds, meaning that their life insurance customers were indirectly affected.
In Chapter 13, consumers similarly often file to stop some bad event from happening—a foreclosure, wage garnishment, a vehicle repossession. How would you weigh the morality of preserving a family home or vehicle or paycheck against threatening the loss of employee pensions or eating away at the value of investors’ life insurance?
2. Cash on hand: When American Airlines filed its case, it had more than $4 billion in cash or cash-like assets, by far more than any other airline that has ever filed Chapter 11. It announced that it expects to be able to ride through the Chapter 11 case without having to borrow any more. So it filed when it was nowhere close to being financially strapped. Why did it do so, besides to gain leverage against its unions and to avoid big payments to bondholders so that it could hang onto its money longer? Because having that much money gives it more independence, so it has more leverage to dictate the terms of any potential merger.
In contrast, most consumers filing bankruptcy wait until the bitter end, when they have exhausted all their other alternatives, often when putting off filing is not in their best interest. Classic examples: using otherwise protected retirement money or borrowing from relatives. Most people delay at least in part out of a sense of moral obligation—they want to pay their creditors, don’t want to see themselves as irresponsible. So what’s more honorable, learning about your options early and then prudently filing bankruptcy when it can best serve you (and your family and your future), or instead doing everything possible to avoid filing no matter the long-term costs? Maybe consumers can learn something from business bankruptcies here, but if anything consumers seem to weigh bankruptcy decisions much more morally than businesses do.
3. Assets: One bit of controversy that has come out of American Airlines case is a swanky piece of real estate it owns, apparently free and clear, used by its highest executives. It’s a five-story home in one of the most exclusive areas of London, worth about $30 million. Now that amounts to only one thousandth of its $30 billion in debt, a relative drop in the bucket. But if you are trying to wrestle concessions out of your labor unions, and have a judge overseeing your operations, that kind of opulence obviously doesn’t help make your moral case.
In a consumer bankruptcy, you can protect assets that are “exempt,” but those exemptions generally cover only your bare essentials. In a Chapter 13 case you can usually also keep exempt assets that are not exempt, but you need to pay for the privilege. Businesses tend to get away with a lot more on the grounds of “business necessity.” So what’s a more moral procedure, a consumer bankruptcy which makes you account for and then either surrender or pay for any nonexempt assets, or a business bankruptcy which is not as restrictive about assets?
Business decisions, including and especially to file a bankruptcy reorganization, are moral decisions because they can hurt people. American Airlines will likely break many thousands of promises through its Chapter 11 case. Likely a large portion of those broken promises will be to employees who invested in and counted on those promises for many years. In contrast, most individuals who file bankruptcy are not directly harming other individuals. That doesn’t necessarily make it better morally, but my point is personal bankruptcies are at the very least not worse than business bankruptcies, even though that is how they are commonly portrayed. Both business and personal bankruptcies have a moral component. Maybe that component should be emphasized more in the former and less in the latter.