How does allowing a large corporation/organization to reorganize in bankruptcy protect consumers?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The reorganization of a bankrupt corporation typically takes place under Chapter 11 of the bankruptcy code.  The main goal of Chapter 11 is not really to protect consumers.  However, there are at least two ways in which we can say that it does protect consumers.

First, reorganization keeps the firm from failing and thereby being unable to meet its obligations to consumers.  When an airline goes bankrupt, for example, it still has huge numbers of tickets that it has already sold.  Without reorganization, all of the consumers who bought those tickets would likely lose what they had paid without getting anything in return.

Second, consumers are also workers.  They can be badly harmed if their firm fails.  By allowing the firm to reorganize in bankruptcy, the government prevents all of those people from losing their jobs.  This can be seen as consumer protection as well.

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