Lehman Brothers’ creditors might have been shocked when Harvey Miller, the lawyer appointed to the case of the bankruptcy of US investment bank Lehman Brothers, told the congress it might take up to two years —and 2,000 million dollars — to reach an agreement. He also stated back then some creditors could only receive 20 cents for each dollar listed in approved claims. For some, the Lehman Brothers case is an example of how the costs associated to bankruptcies often go through the roof —considering as well that in most bankruptcy processes there are lawyers and counselors that just profit off of the creditors. Furthermore, these costs have always been under scrutiny during several of the most echoed bankruptcies in the past: General Motors, Chrysler and Washington Mutual, just to mention a fistful of such events.
Suzzanne Uhland has studied corporate bankruptcies for quite a long time, and alongside experts, she agrees upon the fact that figures contained in bankruptcy processes are not as high as they might see at first sight, given the complexity of the institutions involved (like Enron or Lehman Brothers). In reality, the most daunting and expensive aspect within bankruptcies might end up being something totally different: too many companies and corporations file for bankruptcy in hopes of solving their financial problems, just to get back to where they were in the first place, which is: in the realm of financial crisis. This does not mean, though, that costs inherently related to bankruptcies cannot be far less than they often are. Bankruptcy rules help companies get funds and cope with their creditors while restructuring: this is actually something fondly value by executives, as they assert without hesitation that the tariffs do not presuppose an issue, since creditors will ultimately absorb the cost —and they (creditors) are too timid to question such values anyway.
Most bankruptcy advisors agree upon the fact that companies that filed for bankruptcies can experience a reduction of up to 20% in their legal costs when they are properly supervised. However, it is definitely a tough task to determine which figures have been inflated and which have not. The idea of some professionals perceiving millions from apparently failed and broke companies is just, at the very least, somewhat peculiar —and even something worse—, but determining how much a restructuring costs is definitely an increasingly elusive issue. As of the last decade, high profiled companies that have filed for bankruptcy actually made lawyers and counselors richer: nine out twenty of the most resonant bankruptcies —which happened to have taken place during 2008 and 2009— ended up making bankruptcy lawyers richer, since they were charging up to 1,000 dollars per hour. Nevertheless, in spite of the exorbitant expenses derived from cases like Lehman Brothers —limousines, tellers, and chargeable hours—, experts assert that such costs not only are difficult to judge, but also that they are relatively small.
In reality, lawyers do not perceive a single cent in 35% of bankruptcy cases (Chapter 11), generally because such events reach an agreement or the company ends up being liquidated. And by reducing the time spent in such dreary processes, even the most expensive chargeable hours results insignificant, experts say.
More important than legal tariffs and bankruptcy counseling, indirect costs happen to be a crucial factor: sales and profit lost consequence of an uncertain environment —alongside the company’s issues—. These can add up over time up to 10% and 15% of the company’s net value, which is why, as mentioned before, lawyers and counselors, even though they really charge “a lot”, their costs are rather trivial compared to these hidden costs —especially when the other expenses are put into perspective: lawyers tariff is often depicted by 1% or even 2% of the company’s active value, and 4 or 5% in smaller businesses.
In the end, regardless of whether a company is considering to undergo a restructuring plan, it is important to mention that if companies effectively decide to do so, the next step cannot be filing for another bankruptcy or even the company’s liquidation. History has proven that the system can be outsmarted, and some companies should not have been allowed to restructure —and should have been liquidated instead—. Many companies have served as the perfect opportunity for unscrupulous people to profit off of the situation; some other cases have proven that forcing companies to restructure too soon results in a sheer array of people demanding better tariffs. The vast majority of companies that file bankruptcy manage to get out of it, but they surely do not do unharmed, in fact, out of the percentage that manages to survive bankruptcy, just a few seem to depict signs of corporate health. The real issue is not found in the cost associated, but in the likelihood of having to file for a second bankruptcy.