Pre-Bankruptcy Dynamics and Unsecured Debt

Abstract

We analyze the impact of pre-bankruptcy dynamics on the levels of unsecured debt at the start of bankruptcy procedures, using a unique sample of small distressed firms that reorganize under Belgian court-supervision. These firms rely on trade credit if banks withdraw their lending prior to bankruptcy. Apparently trade creditors are willing to finance a distressed firm's shortfall in cash flow during this period. They also accumulate unpaid taxes and social contributions in the running-up to bankruptcy reorganization, pushing the government administration in the unintended role of lender of last resort. These findings suggest that pre-bankruptcy dynamics strongly affect the debt structure at the moment of initiation of the procedure and in this way the ultimate outcome of the restructuring process.

Keywords: court-supervised reorganization, bankruptcy, pecking order, trade creditor theory, lender of last resort

JEL Classification: G33, G38, K20