Bankruptcy, Business

Direct and Indirect Effects

U.S. bankruptcy filings directly affect tens of millions of new persons annually and many more tens of millions of persons indirectly. Those directly affected are generally the laborers, managers, long-term lenders of secured capital, and owners, including shareholders. These individuals and organizations, as direct participants in the business, have a vested interest in the vitality of the business. Thus a business failure usually impacts them more immediately and more severely. However, a business bankruptcy may also harshly affect indirect participants in the business, such as suppliers of raw materials, customers down the supply chain, and especially the residents of the cities, regions, and national economies of the bankrupt business.

The direct effects of bankruptcies are usually reported first, as they are the easiest to measure. Among these are the impacts on the financial investment in and the human capital of the business. The effects on the financial investment tend to be the loss of capital invested, including reductions in revenues and profits and, if it is a publicly traded company, the drop in share pricing. The effects on the human capital are, bluntly, the job losses associated with the bankruptcy and subsequent restructuring or sale of the business.

As an example of indirect effects, an automotive industry analysis stated in June 2006 that 24 percent of parts suppliers to the world's automobile companies themselves faced fiscal danger as a result of the near bankruptcy of their clients, in addition to the US$60 billion in parts supplier company bankruptcies since 2001 in North America alone.

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