Today I spent an interesting day in federal bankruptcy court. I got to watch how easy it is to file a Chapter 7 no asset liquidation in the US. Rather than the system looking to process the claimants assets, it is set up to transfer these assets at a fixed price back to the bankruptcy claimant.
I recall visiting these same procedures a decade ago and there was specific value assigned to the fixed assets. Computers, security systems, mailing lists, even chairs and staples where auctioned off for the disposition of the creditors.
But today in our low value society rather than these items auctioning for 10% on the dollar, they transfer to the debtors hands effectively for $0. In fact the court stands ready to do this very efficiently. Is this more efficient for the economy as a whole than the previous system?
Most self store facilities, hold an annual auction. You can find them weekly in the Times Union. All the clients who have stopped paying their storage bill have their possessions auctioned off the the high bidder. Many people run successful antique, eBay, and other businesses with this steady steam of low cost undervalued assets.
But when the federal bankruptcy court declares that there are essential assets not worth "over a $1000" and allows these assets to fully transfer to the now liquidated debt it hurts the economy.
Rather than these assets flowing through the efficiencies of the successful antique, eBay, and other liquidation businesses, these tools of profit stay with the original owner. This owner may use them to rebuild their cash flow, but often they lay dormant, as these previous owners typically have lost critical market reputation.
I could argue there are just too many of these bankruptcies. The manpower does not exist for these assets to really be disposed of unless there are high quantities of valuable items. But that missed the point. For every dollar that is transferred through the fair action process there is an increase in business value to someone, up to the amount that the assets are undervalued. So if they auction for 10% on the dollar that is up to 90% of the ultimate selling price!
But for every dollar that is written off to bad debt, a multifold amount is removed from the creditor's ability to extend credit to the next credit worthy business.
So it is only by recycling these assets through the successful antique, eBay, and other liquidation businesses that the small business marketplace can create a return on investment that can flush away the hit from the reduction in business credit. The issue is not what is the price of money at the Federal Reserve or your local bank. The issue is what is the return on investment your company can achieve.
Federal policies that do not allow the free market to self adjust make recessions last longer, and remove the jobs that would be created by an efficient liquidation market.
