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What does It Mean to be Bankruptcy Remote?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 December 2016
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The concept of being bankruptcy remote has to do with holding a position in which the potential of having to file bankruptcy is kept to a minimum, based on the financial solvency of the individual or business operation. Measuring the degree of remoteness from the possibility of bankruptcy requires not only looking at the internal operation of the business, but also comparing its current status to the status of companies operating within the same industry. The idea is to determine how well the business could use its resources to respond to some sort of economic downturn and still remain a financially stable entity capable of maintaining operations as the downturn runs its course.

To a degree, many businesses are bankruptcy remote by the very nature of their corporate structure. This is especially true with limited liability companies, in which the amount of financial liability sustained by the company and its officers is kept within a certain range. With this structure, there is a good chance that the company can overcome financial obstacles even while operating at a reduced pace, and at some point in the future become profitable once more.

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The value of being bankruptcy remote can be especially important when there is a corporate group involved, with several different companies operating under the same umbrella. Depending on the exact structure of the incorporation of each business and the bankruptcy laws that prevail in the nation in which the companies are based, all other members of the group are immune from bankruptcy in the event one member company does fail and must go bankrupt in order to settle its debt. In contrast, if those laws allow assets of the other members of the corporate group to be seized and sold in order to retire the debts of the one entity, the level of bankruptcy remoteness may not be as pronounced.

With a stand-alone business that is not part of a corporate group, being bankruptcy remote is key to continued operation and is normally assessed using one basic qualification. One has to do with the assets in the control of the business, especially those that are not key to the operation and could be converted into cash to keep the business afloat if demand for its goods and services fell dramatically during a recession or other adverse economic state. Should the business have assets that are considerably broader in scope and value than those of the competition, the bankruptcy remote potential is considered higher than those other companies, since the business is more likely to be in a position to wait out the poor economy and be ready to increase production once the economy improves and demand for its products returns.

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Drentel
Post 2

@Sporkasia - As a business owner I am bothered by all of the lawsuits we are seeing today. With all the lawyers rounding up clients for all of these medical suits and injury claims, I don't think any company is that far from having to declare bankruptcy. All it takes is one big verdict in a lawsuit and the healthiest company will find itself running for cover.

Even with liability insurance and a healthy company, I sometimes wonder just how far from bankruptcy I am given a bad string of luck. You never know when an employee or a client or a customer of a client is going to blame you for an accident and then hire a lawyer and come after you.

Sporkasia
Post 1

When lawyers are representing clients who are suing large corporations, the lawyers can use this bankruptcy remote measurement to see how likely the company they are suing is to file bankruptcy. This is important because once a company files for bankruptcy the people suing may never see their money, depending on how much money the company has and how much it has to pay out.

A company that is bankruptcy remote is more likely to be willing to reach settlements with people who are suing because it has enough money and assets on hand to settle without having to protect itself by filing for bankruptcy.

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