The bargaining power of creditors and debtors in a bankruptcy process refers to their ability to negotiate and influence the terms of the bankruptcy agreement. This negotiating power differs before and after the bankruptcy stage, so it is necessary to consider each of their negotiating powers and strengths during these stages.
Different objectives between creditors and debtors:
According to Vernimmen, Quiry, Dalloccchio, Le Fur & Salvi (2017), creditors always want to speed up bankruptcy procedures and liquidate the bankrupt company's assets as much as possible, as the value of those assets decreases rapidly in the event of a bankruptcy declaration. On the other hand, shareholders and debtors generally want to avoid liquidation for as long as possible, hoping for the company's recovery. The company's shareholders will lose their money, and those managing the bankrupt company will lose their reputation.
Stages of negotiating power in the bankruptcy process:
In the bankruptcy process, the bargaining power of creditors and debtors can vary depending on several factors, such as the type of bankruptcy, the amount and nature of debts, and the debtor's overall fidebtor's condition.
In Bankruptcy Chapter 7: In this type, the debtor's assets are designated to pay off the debts. In this case, the creditors' bargainicreditors are generally higher because they can receive payments from the debtor's assets. Dedebtor, in this situation, has less bargaining power and is primarily concerned with protecting any assets that may be exempt from liquidation (Bris, Welch & Zhu, 2006).
In Bankruptcy Chapter 11: In this type, the debtor proposes to the court a reorganization plan, which the creditors must approve. The debtor usually negotiates with creditors to agree on the plan's terms. Crediplan'san uses their bargaining power to demand payment of their debts or to push for changes in the debtor's management. The debtor can use its bargaining power to negotiate more favorable repayment terms, such as lower interest rates or more extended repayment periods, or to protect certain assets from liquidation (Altman, 1993).
Example of bargaining power:
The company I presented in the second discussion of the first week (SWVL) has not filed for bankruptcy, and no negotiations have occurred between debtors and creditors, so I will give two more examples:
General Motors (GM) 2009 bankruptcy: The company filed for Chapter 11 bankruptcy and owed billions of dollars to its creditors, including bondholders, unions, and suppliers. The company had to negotiate with its creditors to restructure its debt and operations while remaining in business. The bargaining power of the creditors allowed them to demand changes in the management and operations of the company, such as closing factories and laying off workers. At the same time, the debtor negotiated for more favorable payment terms and the protection of some assets. Here the bargaining power of creditors and debtors was more balanced than in Chapter 7 bankruptcy (Cooley & Cooley, 2011).
Toys R Us 2017 Bankruptcy: The company filed for Chapter 11 bankruptcy and used the bankruptcy process to restructure its debt and operations while continuing to operate its stores. The company negotiated with its creditors to reach an agreement on the terms of the reorganization plan. The bargaining power of creditors allowed them to demand changes such as closing stores while debtors negotiated for more favorable payment terms and protection of some of their assets. Ultimately, Toys R Us could not reach a deal with its creditors and was forced to liquidate its assets and close all its stores (Maneepan & Jumreornvong, 2017).
Conclusion
In general, creditors' bargainicreditors are usually higher in bankruptcy because they have legal rights to recover their debts. However, debtors may be able to negotiate for more favorable repayment terms or protect their assets through relief and other legal mechanisms.
References
Altman, E. I. (1993). Evaluating the chapter 11 bankruptcy-reorganization process. Colum. Bus. L. Rev., 1.
Bris, A., Welch, I., & Zhu, N. (2006). The costs of bankruptcy: Chapter 7 liquidation versus Chapter 11 reorganization. The journal of finance, 61(3), 1253-1303.
Cooley, S. C., & Cooley, A. B. (2011). An examination of the situational crisis communication theory through the general motors bankruptcy. Journal of media and communication studies, 3(6), 203.
Maneepan, M. P.,& Jumreornvong, S. (2017). THE ANATOMY OF BUYOUT FAILURE: THE CASE OF TOYS “R” US (Doctoral di"s"rtation, Thammasat University).
Vernimmen, P., Quiry, P., Dalloccchio, M., Le Fur, Y., & Salvi, A. (2017). Bankruptcy and restructuring. In Corporate finance: Theory and practice. (5th ed., pp. 852-862). John Wiley & Sons, Incorporated. Retrieved from EBook Central