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Criticism
Criticism
Some critics have claimed that Chapter 11 bankruptcy is excessively lenient in
giving a needless "escape hatch" to the incompetent management of a failing
company, damaging the efficiency of the economy as a whole and allowing poor
managers to continue managing. It is unusual for the management of a company in
Chapter 11 to be fired, as it is usually assumed that the present management
team knows far more about the company and its customers than would a new set of
management. These critics note that in Europe, bankruptcy law is far less
lenient for failing companies.
Another efficiency criticism is that a company undergoing Chapter 11 bankruptcy
is effectively operating under the "protection" of the court until it emerges,
in some cases giving the bankrupt company a great advantage against its
competitors, distorting the market and harming more competitive businesses.
Where a key market participant (or more than one) goes into Chapter 11, it can
also result in significant over-capacity in the industry. The most-cited current
example is the airline industry in the United States; as of 2006, over half the
industry's seating capacity is on airlines that are in Chapter 11. These
airlines have been able to stop making debt payments, freeing up cash to expand
routes or weather a price war against competitors — all with the bankruptcy
court's approval. This is especially important in the airline industry as fixed
capital costs for the airplanes (and the debt on those costs) make up such a
large part of the airlines' expenditures.
Others criticise the process on the basis that, by forestalling the creditors'
rights to enforce their security in the event of non-payment, it reduces the
economic value of collateral in the United States, and thereby increases the
cost of secured lending. However, studies on the subject seem to reach different
conclusions on the extent of this, or indeed whether it is in fact the case at
all in practice.
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