According to critics, what are some problems with the bankruptcy system?

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According to critics, what are some problems with the bankruptcy system?

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According to critics, what are some problems with the bankruptcy system?

Explanation & AnswerSolution by a verified expert

Explanation

Following are the problems with the bankruptcy system according to the critics:

Bankruptcy courts are unable to protect the creditors, which is their prime role. Large companies can still avoid liquidation at the cost of its creditors and shareholders with the high priced legal help.
 Bankruptcy courts drag the cases too long and deplete the value of the company's assets. Quick resolution is not possible in these cases because bankruptcy judges must resolve issues related to labor disputes, pension plan funding, and so on. For a prolonged time, the consultants, lawyers, investment bankers charge heavy fees, which keeps on depleting the company's assets. These assets could be sold off to pay the creditors.
Time granted to the company to form a reorganization plan is too long. When a company needs to liquidate as soon as possible to raise a sufficient amount to pay its creditors, the prolonged period due to the time given for the reorganization plan depletes the value of its assets.
A bankruptcy court is not a better judge of a company's worth than the market. An auction like procedure must replace judicial protection and supervision. The auction procedure involves shareholders and creditors to raise money for paying the bills, which allows the market to decide if the firm is worth more dead than alive.

Verified Answer

Following are the problems with the bankruptcy system according to the critics-

Bankruptcy courts are unable to protect the creditors, which is their prime role.
 Bankruptcy courts drag the cases too long as a result, company's assets deplete in value.
Time granted to the company to form a reorganization plan is too long.
A bankruptcy court is not a better judge of a company's worth than the market.

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