15 September 2009

The Chance to Start Again

This article is excerpted from the book Outline of the U.S. Economy, published by the Bureau of International Information Programs. View the entire book (PDF, 3.26 MB).

If it is easy to launch a business in America, it is also relatively simple to try again after a failed attempt. The philosopher Erich Fromm said that the “freedom to fail” was essential to overall freedom, and the adage is often cited as a basic tenet of American economic life.

U.S. bankruptcy laws govern business failures. The U.S. Congress has tried to strike a balance that recovers as much of a failed company’s assets as possible for lenders and creditors, while providing financial protections that can allow some entrepreneurs to gain a fresh start. The bankruptcy process may differ for individuals, small enterprises, and large, publicly owned corporations.

A small business that cannot pay its bills usually will go through what is called a liquidation, selling all of its assets to pay what it can to its creditors. Some of the business’s debts are paid ahead of others, and a bankruptcy court appoints a trustee to see that the process follows the rules. Banks and other “secured” lenders are high on the repayment list, as are most employee wages. But if there are public shareholders, these owners—who have assumed more risk in exchange for greater potential reward—are on the bottom and often get nothing as the business closes its doors.

Large companies that can’t cope with their debts may choose what is called a Chapter 11 bankruptcy process, which allows a company to stay in business while it tries to recover. If the company still has valuable assets or some cash coming in, and if its crisis seems temporary, creditors may choose to take less than full repayment of their claims initially to let the business survive and continue repaying its creditors. In this case, too, shareholders might be wiped out, but the business can survive.

Bankruptcy law also enables individuals to escape unmanageable debts and start over, although they may lose their homes. This escape route can be crucial for people who lose their jobs or for families facing heavy medical bills, for example.

The bankruptcy laws are part of the American cultural belief in the second chance. This story is woven deeply into the national fabric of migration and settlement that began with the first boatloads of European arrivals and never stopped. French political thinker Alexis de Tocqueville found in the 1830s an innate restlessness among Americans, who were constantly changing course “for fear of missing the shortest road” to success and happiness.

The historian Frederick Jackson Turner, marking the 400th anniversary of Columbus’s 1492 landing in the New World, defined the American frontier as an integral cultural catalyst. The steadily changing frontier, lying ever west of existing settlements, was a magnet for migration, pulling footloose Americans ever westward, Turner wrote in 1893. He attributed distinctive aspects of the predominant American character—individualism, risk-taking, suspicion of authority, and optimism—to this frontier experience.