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How Will WorldCom's Bankruptcy Be Handled? - 2002-07-23


WorldCom's bankruptcy filing, the largest in U.S. history, has sent tremors throughout the financial markets. However, analysts insist U.S. bankruptcy laws are designed to stabilize a troubled company, for the sake of its creditors, employees and consumers.

When a company files for bankruptcy, attorney Chester Salomon said, business continues, all efforts to collect the firm's debts stop and its creditors form a committee.

"The creditors committee becomes the watchdog group that is responsible to watch what the company is doing, to investigate the bankruptcy causes, and most importantly, to negotiate a plan of reorganization with the company that will protect and advance the interest of the creditors to the greatest extent possible," Mr. Salomon said.

This reorganization plan may entail selling off assets to pay off debts, shifting personnel, or, in cases of fraud, seeking out the perpetrators. Mr. Salomon said the creditors committee might take action against former WorldCom Chief Executive Bernard Ebbers, for example.

"If the creditors pursued Mr. Ebbers for the substantial loans he had taken from the company and the management team did not seem to be willing to go forward, the creditors could ask the bankruptcy court to bring an action against Mr. Ebbers and collect what can be collected," he said.

The court has appointed an independent examiner to investigate allegations of fraud. Professor David Skeel, the author of Debt's Dominion: A History of Bankruptcy Law in America, said an attempt by Worldcom to deal with its own mismanagement might help the economy.

"There's obviously a crisis of confidence about American business at this point and how WorldCom is handled may say something about how long that crisis continues. If it is dealt with decisively, and WorldCom tries to go after the people who have misbehaved, that might help the market more generally," Mr. Skeel said.

And what is good for the stock market and the U.S. economy will be good for the resolution of WorldCom's bankruptcy, Mr. Skeel said. It is harder to sell off assets to repay debt in a weak economy, he said, just as it is harder to rebuild a floundering business.

"During the Great Depression, lots of railroads were in bankruptcy, and some of them stayed in bankruptcy for years just because nobody could buy their assets. The worst case scenario with WorldCom is that we'll see something like that, that the industry will be treading water for the next three years rather than solving its problems in the near term," he said.

Like the railroads, David Skeel said, WorldCom will emerge from bankruptcy in a healthier form. The question is: How long will that take?

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