Challenges, problems, and triumphs
-- from a manufacturer's perspective.
Some Thoughts on Bankruptcy
It's unfair, but ....
by Mike Hartnett (January 7, 2008)
Junkitz filed for Chapter 7 bankruptcy – liquidation – just
before Christmas, and once again I've received complaints from
suppliers venting about the unfairness of it all. I've written a lot
about bankruptcy over the years and I've never figured out if the
bankruptcy laws make sense or could be improved.
Retailers close their doors without paying vendors and vendors
walk away leaving their suppliers in the lurch. Banks and credit
card companies loan money to consumers and encourage them to spend,
spend, spend, then scream when those customers are bankrupt.
And it's not just small companies. Rag Shop was a major chain in
the East; a couple of years ago it told its vendors if they didn't
take 25 cents on the dollar as payment, the company would shut down
like Junkitz. The vendors reluctantly agreed, saving Rag Shop about
$8 million. Then 14 months later Rag Shop shut down anyway, and this
time vendors will probably get nothing.
1. It's unfair to creditors. Absolutely no question about
that, but look at the larger picture: keeping a company afloat saves
jobs. When Ames was in Chapter 11 (reorganization), it was reported
that by staying in business, Ames was keeping as many as 10,000
But the articles never checked to see how many employees of Ames'
vendors were laid off because Ames only paid pennies on the dollar.
Ames emerged from bankruptcy, then went bankrupt again a few
years later. This time it closed its doors and eventually led to the
demise of Craft World, once the industry's largest distributor, whom
Ames stiffed for $1.3 million.
2. Secured creditors and lawyers. It's unfair that they get
paid in full before the unsecured creditors (the vendors) receive a
penny. But stop and think: banks wouldn't loan money if they weren't
assured they'd be first in line when a business fails.
The bankruptcy laws, like so many other laws, are endlessly
complicated. No bankruptcy case would ever be resolved without
lawyers, and no lawyer would take a case if he thought he wouldn't
Years ago when I was editor of Craftrends, I was asked to
serve on the unsecured creditors committee for a large industry
company, which owed Craftrends for some advertising. I
thought serving on the committee would be interesting and agreed. It
took an enormous amount of time, mostly conference calls, but what
truly shocked me was the amount of paperwork. It seemed like any
time someone sneezed, a lawyer would send us a report. By the time
the case was resolved, I had a stack of paper almost a foot tall.
Bottom line: Craftrends received virtually nothing.
Occasionally a CLN subscriber has declared bankruptcy and
listed CLN as a creditor because the company owed for its
subscription. Then I receive letters from the court about the case.
I'm sure it cost more for a lawyer to send me those letters than it
would have been to pay for the subscription in the first place.
3. The 90-day payback is unfair. A portion of the law
requires any vendor who received a payment within 90 days of the
bankruptcy filing should pay that money back to the bankrupt
company, even if the creditor is still owed thousands – or
Here's the rationale: Suppose I have a business that's not going
well and I'm afraid I'll end up in bankruptcy. I have a vendor,
Vendor A, who is a good friend and I don't want to see him hurt any
worse than possible. So I pay him what I can, and ignore Vendors B,
C, and D. Then I file for bankruptcy. That's human nature, but is it
So every creditor is supposed to return any payments received
during that 90-day period. Then the court collects all that money,
sells the company's assets, and then divides it among all of the
That's fair, but the poor vendor who was owed $10,000, received
$50 prior to the bankruptcy, then received a letter from a lawyer
demanding the vendor pay back the $50. "It's like they stick
the knife in with the bankruptcy," one exasperated manufacturer
told CLN, "then they twist the knife demanding the money
Meanwhile, the lawyer probably charged the court $50 to write the
Years ago I wrote a column about the 90-day requirement and
received a panicked phone call from a small vendor who somehow had
received a payment from a chain in trouble. "If I have to pay
that back, I'll lose my house," she said.
The chain hung on a few months longer before filing for
bankruptcy, so the vendor's house was saved. Later the vendor sold
her company, which today is one of the leading brands in its
So, any ideas about how to improve our bankruptcy laws? Email
your thoughts to CLN at email@example.com.
I'm all ears.
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