It occurs when major stakeholders do not trust each other. They dig in and insist that other stakeholders should take a bigger whipping. The reorganization plan leaves the court with unresolved systemic and structural issues. If you take a couple of steps back, it becomes apparent that these entities deserve to go out of business because they demonstrate uncontrolled auto-immune disease: They are no longer viable.
The two largest reorganizations seen in Michigan involved General Motors and the City of Detroit.
General Motors now has an "Altman Z-Score" of 1.3. High numbers are good. Low numbers are bad. A Z-Score less than 1.8 indicates a "distressed" company. A Z-Score between 1.8 and 3.0 is considered to be in the "gray" or "watch" zone. Z-Scores above 3.0 are considered "Safe".
And that is with a record shattering 17.5 million domestic vehicle market in the rear view mirror. One wonders how it will respond if credit tightens or when the market must digest an increasing glut of off-lease vehicles.
The preliminary draft of the Detroit Bankruptcy identified the legacy costs associated with a huge base of retired (and soon to retire) municipal workers, generous pension benefits and a shrinking population base. The preliminary draft also threw a stake into the ground that retirees would receive 17% of their promised benefits to leave the City on healthy financial ground. That is, they would take an 83% hair cut if the first order approximations (back of envelope calculations, if you prefer) were followed.
After much dickering, the pensions were cut a whopping 4.5%.
That is the equivalent of a doctor doing triage determining that a patient needed to have their left leg amputated at the hip. And then the hospital's board of directors authorizing an amputation at the ankle.
This is a viable strategy if you believe in unicorns and magic, leprechauns and philosopher's stones.
The rest of us figure it is just a matter of time before Detroit is back in Bankruptcy court. The only question in our mind is whether it is Chapter 11 or Chapter 7.