Insolvency is not a necessary condition for bankruptcy. Moreover a firm may petition the court for protection under Chapter 11 even though it is not insolvent. If the business can demonstrate real financial trouble, the court will generally not dismiss the petition. In recent years, Chapter 11 has been looked upon as a safe harbor for gaining time to restructure the business and to head off more serious financial problems. For example, when Johns Manville filed a petition under Chapter 11, it was a profitable, financially sound company. Yet it faced numerous lawsuits for damages resulting from asbestos products it sold. Reorganization helped Johns Manville deal with its financial problems.

Over the years, the filing of a voluntary Chapter 11 bankruptcy petition has been a tool that companies sometimes use to settle significant financial problems. Just as Johns Manville reorganized to settle the claims of asbestos victims, A. H. Robins followed a similar path to resolve thousands of lawsuits stemming from injuries resulting from the Dalkon Shield intrauterine device. Even if protection from litigation is not a primary driver of a bankruptcy, that can be one major result. Chrysler is immune from new punitive-damage claims from any alleged manufacturing defects in vehicles sold before the auto makers 2009 government-brokered restructuring. Chryslers legal exemption, approved by a bankruptcy judge, is the product of rules embedded in the federal bankruptcy law. These rules allow sick companies at times to abandon product liability or other risks, overruling state laws that give consumers the right to seek damages.

What is the real purpose or benefit of the Bankruptcy Laws?