For an organization or a company to be considered bankrupt there are certain things that are considered. The company’s debt might be higher than the funds they have, when the company has quite too many creditors pounding at the door, when the company’s attorneys’ offices are under lawsuits and if there are many disadvantages of the company’s legal agreements (Lightstone & Driscoll, 2008). Companies which are bankrupt may not always be comfortable releasing their financial status to lenders for various reasons. In most cases this is because bankruptcy usually is the last resort for a company which cannot pay its debts and cutter for its liability. Usually it gives the company a very bad picture to its lenders which may get the company to a disadvantageous point.
The first reason as to why most companies who have undergone bankruptcy may not be willing to disclose this status to the lenders is because of the lenders may have doubts on lending money to such a company. Going bankrupt via court order shows that the company is really having some shortages in terms of money and perhaps they already have debts with other lenders (Sturges, 2003). Lending is also a business and the lenders are usually cautious not to give loans to company’s which may not be able to pay back. The company’s in most cases will also know this and therefore they feel safe not releasing this information to the lenders so that they are not viewed with suspicion.
A company’s bankruptcy may affect the company for many years after the company has come out of that status. Lenders may just take advantage of the company and manipulate it because they have ever undergone bankruptcy at some point. This therefore implies that the bankruptcy status distorts the company’s image in the eyes of lenders for a very long time.
When a company is bankrupt lenders are likely to view it as a high risk organization and therefore charge a high interest rate or demand that the company pays them back within only a short period of time(Maxwell, 2005). This can be very disadvantageous to the company given that it is already having some financial constraints needing to be solved. Increase in interest rate may mean that the company is not well able to get enough profit from lending the money. A bankrupt company may also risk going into further loses if the lenders have there interest rate increased or demand full payment within just a short period of time before the company utilize the awarded loan.
In most country’s lenders have a guarding body that unites them and gives them advices on lending to people or companies so as to avoid loses and risks. These bodies are also tasked with identifying bad creditors and revealing their identity to all the other lending companies. What this implies is that if a company reveals its bankruptcy status to one lender the information is most likely to get to the lending body hence to all the other lenders. When this happens the company may be listed as high risk customers and many other lenders may drift away from giving loans to such companies (Maxwell, 2005). Not giving the lender the full financial statement and the company’s status on bankruptcy therefore safeguards against such occurrences.
Most companies which are bankrupt may find it safe to keep their bankruptcy status secretive because of various reasons which include having a bad image, being listed by lenders as high risks hence being charged high interest rates, their identity being listed as high risk clients which makes other lenders to be very cautious when lending to them and having there bankruptcy status being referred to many years after picking up.
References
Maxwell, C. T. (2005). Debunking doom: Using an available inconsistency in bankruptcy law to minimize the recourse factor's reclassification risk in chapter 11. The Secured Lender, 61(2), 34-49+. Retrieved from http://search.proquest.com/docview/224924336?accountid=45049
Lightstone, K., & Driscoll, C. (2008). Disclosing elements of disclosure: A test of legitimacy theory and company ethics. Canadian Journal of Administrative Sciences, 25(1), 7-21. Retrieved from http://search.proquest.com/docview/204881195?accountid=45049
Sturges, P. (2003). Doing the right thing: Professional ethics for information workers in britain. New Library World, 104(3), 94-102. Retrieved from http://search.proquest.com/docview/229562839?accountid=45049
