Bankruptcy and Corporate Ethics [LO3] Firms sometimes use the threat of a bankruptcy

Bankruptcy and Corporate Ethics [LO3] Firms sometimes use the threat of a bankruptcy

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July 20, 2022
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Bankruptcy and Corporate Ethics [LO3] Firms sometimes use the threat of a bankruptcy filing to force creditors to renegotiate terms. Critics argue that in such cases, the firm is using bankruptcy laws “as a sword rather than a shield.” Is this an ethical tactic?

Answer and ExplanationSolution by a verified expert

Here is a tip:
Bankruptcy occurs when the value of the assets of the firm is equal to or less than the value of the debt of the firm.

Explanation
It is correct to say that it is ethical because when the creditors lend to the companies, they know the risk of default or the possibility that the companies might go bankrupt. Therefore, keeping the bankruptcy process as a sword rather than a shield is purely ethical.

Verified Answer
Yes, using bankruptcy as a sword rather than a shield is entirely ethical.

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