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How Does Bankruptcy Work?
“Well, you all saw what happened…
The question is not if, but when, you will be fired.
We will all be fired.
What you need to do now is to go up to your desk, call your clients, and resign, because we are out of business.”
I’m not a tax professional or a corporate lawyer. But I am a CFO who’s heard plenty of war stories about bankruptcy from guests on the Run the Numbers podcast.
The most jaw-dropping came from Chuck Fischer, the current CFO at peer to peer car rental network Turo (which is very much a going concern!), who was a managing director at Lehman Brothers on September 15, 2008. At the time this was the largest bankruptcy in U.S. history, with more than $600 billion in assets. For anyone who remembers that day, the collapse of Lehman expedited the oncoming global financial crisis.
Chuck recalled,
“Bear kind of went down and got saved by JP Morgan around St. Patrick’s Day. Roll through the summer and you get to us. That weekend was chaos. Would we be saved? Would someone buy us? Or would we have to ‘Chapter’?
I remember lying in bed in London, staring at the ceiling, waiting for midnight Eastern Time. Boom. It hits. I look at my Blackberry. Lehman files. It’s over.”
But here’s the crazy part…
“Within 24 hours, Barclays emerged to buy the U.S. business. And Nomura was interested in the European assets. But here’s the kicker… we had to prove we were a ‘going concern’ to get the deals done.
We’re an investment bank. The assets go up and down the elevator every day. If no one shows up at the office, there’s no deal.
So we hacked together ways to show people were swiping their badges. We had to figure out how to pay people, because the bankruptcy administrator seized every dollar in our accounts.
We faked it just long enough to make it.”
Red Lobster CEO says endless shrimp is never coming back because 'I know how to do math'
What is Bankruptcy?
The simplest way to define bankruptcy is this:
You owe more than you own, and now a federal judge gets involved.
To that point, bankruptcy is a federally governed process to unwind (or revive) a business. It exists to untangle what’s left and get (some) money back to the people who are owed.
While there are multiple flavors (Chapter 7, 9, 11, 13…), there are really two ‘types’ of outcomes:
1. Shutdown (Chapter 7 – Liquidation)
This is the "lights out" version. The business is done. It sells off its assets and distributes what’s left to creditors.
2. Restructure (Chapter 11 – Reorganization)
This version assumes there’s something worth saving. The company reorganizes operations, sheds debt, and tries to live to fight another day.
Back Up… Why Do Companies Go Bankrupt?
Liquidations usually follow:
Fraud (shoutout to Enron)
A technology cliff (RIP Blockbuster)
Too much debt with no buyer in sight
Reorganizations happen when:
There’s a viable core business
The brand still means something (Twinkies!)
There’s a path to fresh capital (PE, hedge funds, or Uncle Sam)
Who Gets Paid First?
When the music stops, there’s a legal line for who gets what.
Here’s how the capital stack typically unfolds, from first in line to last:
1. Secured Creditors
These are lenders with claims backed by collateral, like a bank that loaned you $10M secured by your inventory or cash balances. If the company goes under, they get first crack at those assets.
No drama here. If it’s secured, it’s theirs. That’s the point.
2. Priority Claims
This tier includes a few key groups, chief among them: employees.
Employees are entitled to unpaid wages (earned within 180 days of the filing) up to a court-set cap (currently $15,150 per person). It’s not unlimited, but it’s better than what most unsecured creditors get.
Also in this tier: certain unpaid taxes (like withheld payroll taxes), and unpaid contributions to employee benefit plans.
This is important to get right because if the employees get screwed, it can “pierce the corporate veil”. That’s a draconian way of saying the companies directors become personally responsible.
3. Unsecured Creditors
This is a wide, sad bucket: vendors, landlords, credit cards, companies that sold you software, and bondholders with no collateral. They often recover cents on the dollar, if anything.
“Unsecured” is legalese for “good luck.”
4. Preferred Equity
If the business had venture backing or raised capital with liquidation preferences, preferred shareholders come next. But even then, it’s rare there’s anything left after the first three groups.
5. Common Equity
Common shareholders (founders, employees with stock options, early-stage angels) are at the bottom. They only get paid if everyone else is made whole.
From speaking with Dori Yona, CEO of a company that helps companies shut down,
“An interesting stat: of the companies that have cash to distribute when they shut down, the average money that we see that is being returned to investors is $630,000.”
Well Known Bankruptcies
As previously mentioned, without getting overly technical, there are two roads to take. one ends in the business ceasing to exist. The other starts a new chapter.
Some companies that didn’t make it:
Companies that lived to fight another day:
If you’re an airline, it’s a right of passage to declare bankruptcy every 5 to 7 years
Don’t Be Michael Scott
Bankruptcy isn’t always a death sentence so much as a sorting mechanism.
It decides who gets paid, what survives, and whether a company has a second act.
But from speaking to those who have been through a proceeding before, what hit the hardest wasn’t the financial losses, but the mental bandwidth required to run a lengthy, arduous, federally mandated process. Even if the company comes out the other side, the time that could be spent on actually running a going concern is wasted. There’s no value creation; just an attempt to save some.
And perhaps the most important lesson:
“No one actually makes money in bankruptcy but the lawyers.”
Run the Numbers Podcast
I had my good friend and GTM expert Kyle Poyar on the podcast.
We discussed:
Usage based credits - why they suck
996 hustle culture - why it’s romanticized (and totally unsustainable)
CAC Payback periods - they’re through the rooooooof
Consumer businesses - Are we sleepin’ on em?
Subscription car wash plans - pricing in the real world
I think this format has legs.
Do you want Mostly Metrics + Growth Unhinged to collab?
Show us some love if you want us to run it back.
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TAM Is the Floor, Not the Ceiling
Most pitch decks treat TAM like it’s:
a) True
b) Inevitable
Both assumptions are, at best, suspect.
Yet, a truth few realize: TAM is not an entitlement. It is not a guarantee of value.
For operators building real businesses, especially in a private equity context, TAM should be treated as a floor, not a ceiling, in any product roadmap decisions.
It is the starting point to start allocating resources into a space. Not the endgame.
Hoping you remember there is, indeed a “t” in bankrupTcy,
CJ
