Bankruptcy--All Too Common

It used to be that companies and individuals saw filing for bankruptcy as a dreaded, last-resort action, but since the 1980s more and more are using the U.S. Bankruptcy Code as just another tool for getting through a difficult time. It’s all legal, of course, but such creative use of bankruptcy laws raises questions.

The latest company to shield itself from creditors under Chapter 11 of the bankruptcy laws is Sizzler International, which operates a nationwide chain of steakhouses. Under Chapter 11, the filer seeks temporary relief from creditors while it reorganizes operations. Like other restaurant chains, Sizzler has been struggling to accommodate the fickle palates of cost-conscious consumers. The chain will close 130 U.S. restaurants, leaving itself with 85 company-owned and 235 franchised restaurants in the United States, and it will let go 4,600 employees, mostly part-timers.

Sizzler described its filing as a strategic move to enable it to escape costly leases on unprofitable restaurants and proceed with a new format. In other cases bankruptcy laws have been used to eliminate labor contracts or curb exposure to massive tort liability claims. For example, as personal injury claims against asbestos makers and their insurers mounted during the early 1980s, many manufacturers filed for Chapter 11 protection, which profoundly influenced the pace of the litigation against them, the amount of compensation paid out for asbestos-related diseases and the availability of punitive damages.

Are bankruptcy laws becoming a catch-all fix for a wide variety of business ills--and is that appropriate? It’s time for Congress to take a look.