What could happen if Twitter declares bankruptcy? Elon Musk’s social media platform is in trouble

On Thursday new Twitter boss Elon Musk warned that the company was in a dire financial position and even mooted the possibility of bankruptcy if the situation did not improve.

In his first company-wide email Musk wrote: “Without significant subscription revenue, there is a good chance Twitter will not survive the upcoming economic downturn,” adding that that company had a “net negative cash flow of several billion dollars”.

The collapse of a public resource as ubiquitous as Twitter seems almost unimaginable, but what could happen if Musk’s new toy went bankrupt?

Why might Twitter go bankrupt?

To understand the repurcussions it is important to first look at the recent events that appear to have taken Twitter to the brink. The site still boasts close to 400 million users, around half of which are active on a daily basis, and it remains popular with the younger demographic.

A large part of the problem stems from Musk’s purchase of Twitter, which lumbered the company with around $13 billion of debt. Musk accepted financing from banks like Morgan Stanley and Bank of America to fund the deal, but the loans are thought to be racking up around $1 billion in interest every year.

Leveraged buyouts are not uncommon, but that usually relies on the company in question being able to turn a healthy profit to cover those debts. Twitter, according to the New York Times, has not made a profit in eight of the last ten years.

In 2021 the annual revenue of Twitter was just $630 million, and that’s before the various costs have been taken into account. In short, the billion-dollar annual payments that Musk has landed Twitter with are simply not realistic with the current model.

What will happen if Twitter goes bankrupt?

With all of that in mind, it is clear that a change is needed to keep Twitter functioning. And that, at a very basic level, is what bankruptcy would allow. The US Securities and Exchange Commission states that federal bankruptcy laws are there to allow companies to “recover from crippling debt.”

Chapter 11 of the Bankruptcy Code allows struggling companies to “to reorganize its business and try to become profitable again.”

“Management continues to run the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court.”

This would be the most likely situation if Twitter were forced to declare bankruptcy, allowing the existing management structure to continue work but under the oversight of an independent bankruptcy court.

But what options are actually available to make Twitter profitable again? A lucrative sale is extremely unlikely given that Musk grossly overpaid only a few months ago and the company’s value has crashed since then.

A first step would likely be to reverse many of the key decisions made by Musk during his brief stint in charge, in the hope of appealing to more advertisers. The preponderance of parody accounts since the introduction of the paid-for verification tick has hurt brands who pay to advertise on Twitter and has slashed the site’s advertising potential.

That, for a company that relies on advertising for around 90% of its revenue, is a fatal failing. The instability in recent weeks, along with Musk’s insistence that he would reduce content moderation procedures, has damaged advertisers’ confidence in the platform. Expect to see Twitter row back on a number of recent changes in a bid to boost advertising revenue and pay off the debt accrued in Musk’s takeover.

Beyond that, the future is unclear for Twitter under the stewardship of Elon Musk.