A New Approach to Valuing Secured Claims in Bankruptcy
Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Jesse M. Fried
Harvard Law School; European Corporate Governance Institute (ECGI)
Harvard Law Review, Vol. 114, pp. 2386-2436, 2001
Harvard Law and Economics Discussion Paper No. 321, 2001
UC Berkeley Public Law Research Paper No. 49
In many business bankruptcies in which the firm is to be preserved as a going concern, one of the most difficult and important problems is that of valuing the assets that serve as collateral for secured creditors. Valuing a secured creditor's collateral is needed to determine the amount of the creditor's secured claim, which in turn affects the payout that must be made to the creditor. Such valuation has generally been believed to require either litigation or bargaining among the parties, which in turn give rise to uncertainty, delay, and deviations from parties' entitlements. This paper puts forward a new approach to valuing collateral that involves neither bargaining nor litigation. Under this approach, a market-based mechanism would determine the value of collateral in such a way that no participant in the bankruptcy would have a basis for complaining that secured creditors are either over- or under-compensated. Our approach would considerably improve the performance of business bankruptcy and could constitute an important element of any proposal for bankruptcy reform.
Number of Pages in PDF File: 50
Keywords: bankruptcy, insolvency, secured debt, security interest, collateral, valuation, bankruptcy reform
JEL Classification: G33, K22
Date posted: April 10, 2001 ; Last revised: May 10, 2009
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