The Difference Between Bankruptcy and Receivership

The Difference Between Bankruptcy and Receivership

What retirees need to know about bankruptcy and receivership
Financial news stations spout the words bankruptcy and receivership as if their definitions were common knowledge. There are important differences between the terms—especially where retirees are concerned.

Bankruptcy vs. Receivership
The most common option for bankruptcy is Chapter 11, or reorganization. Under this option a company continues, rearranges debts by postponing the paying of its bills or by reducing obligations, assets are sold, and proceeds go to creditors. Notice that the process does not necessarily include the consumer. It’s important to note that insurance companies are precluded from filing bankruptcy; they instead go through receivership. In this process, a receiver is tasked with the custodial responsibility of another’s property. Each state governs its own receivership process. Receivers are turnaround consultants who strive to make sure the company survives. They are obligated to maintain transparency with employees, management and consumers in every stage of this process.

Generally, the first stage of receivership is conservation.  In this stage, receivers identify assets and expenses. If the receiver can resolve problems, the company will survive more or less in its original form; if not, the process goes to the next level, called rehabilitation. Receivers in this stage take possession all assets and inventory them. As in a Chapter 11 bankruptcy, debt is rearranged and organized in preparation to pay consumers. If this stage does not resolve the company’s problems, the process continues to its final stage: liquidation.

Liquidation is not quite as bad as it sounds, at least for customers of the company in receivership. We’ll use an insurance company as an example. In the liquidation phase, a receiver would gather information affecting all policy holders and would distribute benefits in accordance with state receivership law. In the worst-case scenario, the liability of a failed insurance company will be shared by other insurance companies in the same area of specialization. Consumers do not lose any of their premium/principal amounts.

Insurance: The “Brick House” Industry

Throughout history, based on data from the National Association of Insurance Commissioners, the insurance industry has maintained more than enough reserves to cover policy holder benefits. This helps explain why leading senior advocate Phil Cannella of First Senior Financial Group describes the insurance industry as “the brick house” of the financial world.