pshao01 asked:
What prevents a company from borrowing a ton of money, spending it all, declaring bankruptcy, and never paying back its creditors?
Details: say the CEO gets a huge “salary” (this is actually borrowed money), buys himself a bunch of toys, then declares bankruptcy and never repays the money. What is the punishment for said CEO?
5 comments ↓
Im assuming NOTHING.
uh…the fact no responsible or intelligent entity would lend money to such an orginization in the first place?
The airline industry managed to stay mostly afloat after declaring bankruptcy, the auto industry can do the same.
Two words: Kenneth Lay (former CEO of Enron).
The CEO can be prosecuted if he does all this intentionally. But, it will take many more than just the CEO to pull it off. A CEO is not “God” in the company. They have to report to the Board of Directors, who report to the shareholders.
Title 11 of the United States Code contains provisions that hold individuals accountable for their actions with respect to bankruptcy filings. There are many provisions under Title 11 that protect creditors from unscrupulous borrowers.
In addition, most cautious lenders require that the owners of a company sign personal guarantees on money borrowed by the company. Most business loans are “secured” or guaranteed by the items purchased with the money borrowed. If the company doesn’t pay, the lender reclaims the collateral.
The most recent incarnation of the bankruptcy code (“BAPCPA”) was written by the creditor lobby. You can bet your bottom dollar that they wrote many provisions into the Bankruptcy Code that protect their interests. In fact, many legal scholars are complaining that the Bankruptcy Code is now too tough on debtors and favors creditors unnecessarily.
Plus bankruptcy fraud is investigated by the Department of Justice and FBI. When any company files bankruptcy a plethora of very smart individuals inevitably take a close look at the books looking for signs of fraud or any other misdeeds.
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