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Difference Between Bailout and Bankruptcy

Hard economic conditions are often unpredictable. While everyone would wish for a stable economy without instances of recessions and inflations, it is sadly not realistic. Governments, companies and even individuals often experience financial lows and highs. Most instances in financial lows often lead to bankruptcy, necessitating bailout measures to prevent an eventual collapse of an entities’ or person’s operations in the economy. In this article, we will look at the difference between bailout and bankruptcy. 

What is Bailout?

This is an action taken by a government, individual or business involving injecting money into a failing business to prevent its downfall. 

Bailout prevents struggling entities from defaulting on their financial obligations or going bankrupt. This can be in the form of cash or stock infusions, loans, or the purchase of bonds. A reimbursement plan may be required, depending on the bailout plan. 

Bailouts are availed to industries or companies whose collapse could have adverse effects on the economy. For instance, the government may be forced to bail out a company that has employed thousands of people to prevent the rise of unemployment. Companies may also step in and acquire the failing entity through a process known as bailout takeover. 

An organization may be forced to adhere to strict requirements such as:

  • Restructuring the organization
  • Lack of dividends to the shareholders
  • Cap on executives’ salaries
  • Change of management

Despite the strict requirements, bailouts have some advantages including:

  • They ensure the continued survival of a business or entity
  • They prevent a complete collapse of an economic-financial sector 

However, they have disadvantages including:

  • Anticipated bailouts may encourage a moral hazard whereby stakeholders undertake higher risks than recommended in financial transactions hence start depending on bailouts when things go south.

What is Bankruptcy?

This is a legal procedure that involves a business or person who is unable to re-pay outstanding debt. The bankruptcy petition is filed by the debtor or on behalf of creditors, which is uncommon. The debtor’s assets are then evaluated and measured after which the assets are used in the repayment of part of the outstanding debt. 

While bankruptcy gives businesses and individuals freedom from outstanding debt, it can make borrowing an uphill task in future as it stays on the credit card for years. However, filing for bankruptcy allows creditors an opportunity to recover their assets. 

Legally debtors do not have to repay outstanding debts once they have a discharge order. A creditor can hence not undertake any collection activities. Debts that cannot be discharged include alimony payments or child support, tax claims and debts issued to the government. 

Advantages of bankruptcy include;

  • It relives debtors of the legal obligation to repay debts hence saving business, homes and the ability to function financially
  • It enables creditors to recover owed assets from the debtors 

However, disadvantages include;

  • It can lower a debtor’s credit rating making it difficult to get a mortgage, loan, rent an apartment or get a credit card in the future. 

Similarities between Bailout and Bankruptcy

  • Both solve issues of financial instability

Differences between Bailout and Bankruptcy

Definition

Bailout refers to an action taken by a government, individual or business involving injecting money into a failing business to prevent its downfall. On the other hand, bankruptcy refers to a legal procedure that involves a business or person who is unable to re-pay outstanding debt. 

Aim

A bailout aims to prevent struggling entities from defaulting on their financial obligations or collapsing. On the other hand, a bankruptcy aims at relieving debtors of the legal obligation to repay debts hence saving businesses, homes and the ability to function financially and to enable creditors to recover owed assets from the debtors. 

Bailout vs. Bankruptcy: Comparison Table

Summary of Bailout and Bankruptcy

Bailout refers to an action taken a government, individual or a business involving injecting money into a failing business to prevent its downfall. However, anticipated bailouts may encourage a moral hazard whereby stakeholders undertake higher risks than recommended in financial transactions hence start depending on bailouts when things go south. On the other hand, bankruptcy refers to a legal procedure that involves a business or person who is unable to re-pay outstanding debt. While bankruptcy relieves debtors of the legal obligation to repay debts hence saving businesses, homes and the ability to function financially, it can lower a debtor’s credit rating making it difficult to get a mortgage, loan, rent an apartment or get a credit card in the future.

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References :


[0]Taylor J & Scott K. Bankruptcy Not Bailout: A Special, Part 14. Hoover Press, 2013.https://books.google.co.ke/books?id=C4CazgIGLuAC&pg=PT64&dq=Difference+between+bailout+and+bankruptcy&hl=en&sa=X&ved=2ahUKEwifgtKhruftAhXd8uAKHbSVCGEQ6AEwAHoECAIQAg#v=onepage&q=Difference%20between%20bailout%20and%20bankruptcy&f=false

[1]Alexander Styhre. The Political Constitution of the Corporation: A Management Studies View. Edward Elgar Publishing, 2020. https://books.google.co.ke/books?id=9C3eDwAAQBAJ&pg=PA75&dq=Difference+between+bailout+and+bankruptcy&hl=en&sa=X&ved=2ahUKEwifgtKhruftAhXd8uAKHbSVCGEQ6AEwAnoECAAQAg#v=onepage&q=Difference%20between%20bailout%20and%20bankruptcy&f=false

[2]Schragger R & Schragger C. R. City Power: Urban Governance in a Global Age. Oxford University Press, 2016. https://books.google.co.ke/books?id=ny3KDAAAQBAJ&pg=PA232&dq=Difference+between+bailout+and+bankruptcy&hl=en&sa=X&ved=2ahUKEwifgtKhruftAhXd8uAKHbSVCGEQ6AEwA3oECAUQAg#v=onepage&q=Difference%20between%20bailout%20and%20bankruptcy&f=false

[3]Image credit: https://www.thebluediamondgallery.com/legal/images/bankruptcy.jpg

[4]Image credit: https://commons.wikimedia.org/wiki/File:Freedom_Homes,_Government_Bailout_Money_(3473264448).jpg

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