The Trump Bankruptcy and You: What We Can Learn

With the upcoming CNN Republican Primary Debate on Wednesday, September 16, 2015, it seems an ideal time to revisit one of the more interesting exchanges during the last Republican primary debate¹⁾Brian was kind enough write up a debate recap in case you missed it hosted by Fox News. While the broader consensus among political commentators was to offer praise to the Fox News moderators for the debate for asking tough questions, an exchange between Fox News’ Chris Wallace and Republican Presidential Candidate Donald Trump seemed amiss, and if it fell short of a targeted attack on Trump, it was at best, a misguided attempt to ask the “tough questions” and provided a skewed view of what bankruptcy actually is.

The exchange began with a fair and legitimate line of questioning when Wallace²⁾or as close as he could get, referencing Trump’s claims to be the best candidate running to grow the economy, asked why “we should trust [him] to run the nation’s business,” when his companies have filed for bankruptcy 4 times in the last quarter century.

You can watch the entire exchange between Donald Trump and Chris Wallace below regarding the Trump bankruptcy:

 

This is a legitimate question. It is no secret that Trump has been involved in bankruptcies in the past, and, to be sure, it is a legitimate question that remains unaddressed in the minds of many voters who are not entirely familiar with the particulars or history of this issue or the mechanics of bankruptcy law. A presidential primary debate is an appropriate forum to address the topic and allow the candidate an opportunity to explain the issue and provide clarity to potential supporters.

Trump’s response³⁾I will paraphrase though you will have to imagine my arms, parallel to the floor, moving toward/away from my body as I make my points was essentially that what he did was not illegal, but rather a legitimate business decision that was made by his companies to take full advantage of the laws available to them at the time, to allow them to move forward in the best way possible, and that it is something that has been done by other successful individuals and businesses many times. Furthermore, Trump has never personally filed for bankruptcy. All true.

 

What Mr. Trump can teach us about bankruptcy

Now is a good time to discuss the different kinds of bankruptcy that exist and who can file for bankruptcy. First, the law treats corporations and other business entities like trusts, LLCs, etc. as a distinct and separate legal entity than the person or persons that own the business. In other words, as far as the law is concerned, a corporation is its own fictional “person” with many of the rights, powers, and liabilities that a regular human being⁴⁾no word if the state control the reproductive rights of corporations, stay tuned has. Creating a separate legal entity allows an individual, or many individuals, to have an ownership interest in a business venture that exists separately from their personal lives. The business may own property and bank accounts for example, or it may enter into contractual agreements like obtaining loans where the business is the sole liable entity. Obviously, there are some differences between individuals and business entities, however, the key point here is that a corporation has the ability to file for bankruptcy for debts that belong to the business.

Further, there are three primary types of bankruptcy which are distinguished by referring to the different “chapters” of the law that allow for the bankruptcy processes to occur: Chapter 7, Chapter 13, and Chapter 11. The first two typically involve bankruptcies for individuals, while the third, Chapter 11, typically is used by business entities wishing to reorganize their debt and continue moving forward with business operations.

Just because an individual or a business has filed for bankruptcy, does not mean that the finances are doomed for the person or business that is filing for bankruptcy. Nor should it mean that society necessarily attaches a negative stigma to the bankruptcy filer. Several of America’s most celebrated entrepreneurs and leaders have filed for bankruptcy including Henry Ford, Walt Disney, Abraham Lincoln, and Thomas Jefferson⁵⁾Source. All of these individuals went on to achieve great things after going through the bankruptcy process.

In most recent time, the Los Angeles Dodgers⁶⁾#Doyer famously filed for Chapter 11 bankruptcy in just 2011⁷⁾Source. Today, the Dodgers are doing so well financially that they have the top payroll in baseball⁸⁾Source, and it is not even close. The next highest payroll team in Major League Baseball is the New York Yankees who pay their players approximately $53.5 Million less than the Dodgers pay their players per year. Suffice it to say, the Dodgers are doing just fine financially, not just in spite of their bankruptcy, but probably partly because of their bankruptcy.

Donald Trump, meanwhile, has never filed for personal bankruptcy. This means that his personal bank accounts, investments, home, cars, and other assets were not part of the bankruptcy analysis in the bankruptcy cases that were filed by companies in which he had an ownership interest. The four times in which companies that he had an ownership interest in filed for bankruptcy, the filed for Chapter 11 reorganization bankruptcies, similar in many ways to the bankruptcy filed by the now financially affluent Los Angeles Dodgers. Trump has seen his companies grow and benefit from the bankruptcies and he estimates his own personal net worth to be in excess of ten billion dollars⁹⁾according to him. Bankruptcies or no bankruptcies, such a staggering accumulation of wealth is an impressive accomplishment to say the least.

 

Was Chris Wallace out of line to question Mr. Trump about his bankruptcy filings?

Let us return to Chris Wallace’s original inquiry and Donald Trump’s response. After Trump’s answer that it was his businesses that filed bankruptcy pursuant to applicable law, Wallace, would not let the issue rest, and bizarrely went on the attack, pushing the issue and highlighting the money lost by lenders to the business. What seemed to be pushing Wallace was an underlying sense that the bankruptcy filings were immoral and that it was a process that was unfair to various lenders that had loaned money to the company. What was missing, however, was an understanding that these lenders made a calculated business risk when loaning money to the company. Yes, the lenders to Trump’s businesses lost money…and so did the company and Trump himself on a certain level. However, any entrepreneur can tell you that anytime a business undertaking with such high stakes is taken, high risks are closely tied to the potential for high rewards. Even the stock market itself is the essence of investment in businesses for the potential of high returns, but it comes at the cost of a risk of loss. What the bankruptcy process involved was a way to allow the business to restructure some of its debt in order to maximize its profitability going forward and to allow all creditors of the business to obtain a fair and equitable solution to the dire financial circumstances that were facing the company. Creditors are intimately involved in the Chapter 11 bankruptcy process, even to the point of allowing them to vote in favor of a plan on how the bankruptcy case is going to be carried out.

There might be many reasons why a person would choose not to vote for Donald Trump. However, the fact that he has owned companies that have filed for bankruptcy, usually as a result of a shrewd business strategy, should not be one of those reasons. If anything, it highlights an awareness of the benefits of the various laws available to business owners and an ability to overcome tough financial circumstances.