We ran across an article in the New York Times that suggested we may be in store for a raft of business bankruptcies, even as more businesses move to reopen.
Full disclosure: We represent folks who are pursuing personal bankruptcy, and the intricacies of business bankruptcy are often alien to us. We refer those cases to other law firms who specialize in that.
But what happens to a big business often has real consequences for people just trying to keep up with their bills. Those are our clients, and we try to keep up with the big business world.
As an illustration, consider General Motors. An iconic company, GM found itself in some trouble 20 years ago. Their vehicle sales were down, debts were high, and they were closing plants. And then the financial crisis hit in 2007-2008. The Federal Government decided to step in and give GM financial assistance. This wasn’t a case that General Motors was, itself, too big and indispensable to fail, but rather the greater impact a GM closing would have.
You see, were GM to fold up shop, thousands of auto workers would be idled. The people who administered their health and retirement plans would be laid off. The company that made their tires would see production slashed. The service shops that specialized in GM vehicles would run out of cars to fix. It would hit the dealerships. The small-parts makers. The food truck that showed up each day when the lunch whistle blew.
Look at it like this: You go to a restaurant, order a nice steak, and a polite server delivers it to your table. Behind that server, someone washed your plate. Someone cooked your steak. A farmer raised the cow, sent it to a butcher, who arranged a truck, which drove to a food distributor, who sold it to the restaurant where the server handed you your steak. For every plate served in a restaurant, there are dozens of people who helped it to happen.
But back to that article…
The New York Times pointed out that not all of this financial pain is directly related to our current state of pandemic. Hertz Rental Cars was feeling some hurt already because of the impact of ride services like Uber and Lyft. They threw all of their chips on the table to expand their fleet and get a larger piece of the pie and bought Dollar Thrifty in 2012. When the coronavirus exploded and people stopped traveling, Hertz found itself hurting with a lot of self-imposed debt.
A company like AMC Theatres, however, has seen their revenue drop to zero as a result of business shutdowns.
For people like our clients, there are a host of ways these coming bankruptcies could have an impact.
If you’re directly involved with a company, through current or previous employment, it’s going to hit your pocket. You may lose your paycheck. It may be your retirement or pension.
You may be the farmer who raises the cow to sell to the butcher so the server can sell someone a delicious steak.
You may have a 401K or retirement plan that has invested heavily in a company that’s now teetering on bankruptcy. Look at your annual statement when it comes out. It’s great to have a ton of diversity in a portfolio, but each little branch of that financial tree bears the weight of some risk.
Some of these companies may survive without a bankruptcy occurring. Some of them may restructure, and emerge leaner and more financially sound. Some may be bought out and return under a new banner.
But it’s worth keeping an eye on. One day soon, you might like to enjoy a nice meal in a restaurant.