Reorganizing Family Businesses in Bankruptcy, and the Problem of Creative Destruction—A Chapter 12 Illustration

Creative destruction? (Photo by Marilyn Swanson)

By: Donald L. Swanson

“Creative destruction” occurs when something new kills off whatever existed before it.

IPhone Example

Just think, for example, of all the creative destruction that the iPhone has wrought! It has destroyed businesses that provided telephones and phone books, cameras and film, audio recordings and players, newspapers and newsstands, and related services.

Businesses unable to adapt to the rapidly changing environment . . . died. The market (i.e., the ever-changing needs and preferences of consumers) is unrelenting. And no amount of restructuring or reorganizing will save a business that is providing something the market no longer wants.

Questions & Answers

So, two questions for every family business in financial stress are these:

1.  Are we dealing with a temporary disturbance or with creative destruction?

The answer is always difficult, because it’s hard to know what’s actually happening, in the moment, when a formerly-successful business is in financial trouble.

 2. If we are facing creative destruction, can bankruptcy provide a reorganization remedy?

The answer is this: sometimes it can. I’ll try to explain with an illustration.

Chapter 12 Illustration

During the 1980’s Farm Crisis, no one knew that the business of farming was going through a seismic shift: from a labor-intensive system requiring many career farmers, to a large-equipment and high-tech system minimizing the need for labor.

Resulting from that Crisis is creative destruction of major proportions: a depopulation of the countryside, replaced by an expansion of production efficiency (i.e., fewer people producing more food at lower cost).

Farms, back-then and today, are mostly family businesses with heavy investments in land, equipment and inventory, and are run by individuals who want, more than anything else, to survive and prosper in farming.

Bankruptcy played a vital role in helping family farms navigate that seismic shift, during the late 1980s and early 1990s. Here’s how:

1. Chapter 11 proved to be an abject failure for family farmers, so Congress created Chapter 12 to provide a reorganization opportunity; and

2. Chapter 12 allowed many farmers to keep their land, maintain their farming operation, and adjust for the future;

For some farmers, Chapter 12 proved to be a turning point: they were able to get back on their feet, adjust to the seismic shift, and not merely survive—they thrived and expanded and blended the next generation into the operation. And it was the business skill (or lack of it) in the next generation that spelled the future success or doom of the farm.

For many others, the Chapter 12 solution meant a single-generation fix: the next generation moved on to other career opportunities. And the family’s farmland ultimately went on the market, voluntarily, to be gobbled up by farm families that survived.

Application to Other Contexts

Chapter 12 reorganization proved to be a valuable tool for helping families navigate the seismic shift that rocked the world of farming in the 1980s and beyond.

The Chapter 12 farming experience shows that bankruptcy reorganization can help family businesses navigate difficult financial times, whether the difficulties are from a temporary disturbance or from creative destruction.

Farming may well be atypical, because it involves, (i) the ownership and use of a finite resource—land, and (ii) the production of food, for which there is an unceasing demand. But the helpful role of Chapter 12 in the 1980s Farm Crisis is, nonetheless, an illustration of how bankruptcy reorganization might help family businesses in other creative destruction contexts as well.

And Subchapter V is an extension to other businesses of what Chapter 12 provides for farmers.


Bankruptcy reorganization can provide a valuable service to family businesses in financial stress—even when that stress is from forces of creative destruction!

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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