Direct Costs in Chapter 11 Bankruptcies

57 Pages Posted: 15 Aug 1998

See all articles by Robert M. Lawless

Robert M. Lawless

University of Illinois College of Law

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance

Date Written: August 1998

Abstract

This paper makes the first attempt at a comprehensive and general assessment of chapter 11 costs. The findings are based on a random sample of 118 case files from six federal judicial districts. The data was collected by hand through reading of individual files. We find that chapter 11 costs appear to be of a relatively low magnitude. In the median chapter 11 case, costs consumed 4.7% of distributions to all creditors or, stated alternatively, 3.5% of total assets listed at filing. The paper also informs a theoretical debate about the efficiency of secured credit. Our results suggest that secured credit can create efficiencies by lowering chapter 11 costs. Unsecured creditors also appeared to be receiving significant recoveries. At the same time, we also find evidence that secured credit may result in wealth transfer that decrease firm value. From a bankruptcy-costs perspective, secured credit appears to be a net gain for the firm. We stop short, however, of an unqualified endorsement of secured credit. Although secured credit may lower chapter 11 costs, it also may have pernicious, unmeasured effects on firm value.

JEL Classification: G33, K39, K22

Suggested Citation

Lawless, Robert M. and Ferris, Stephen P., Direct Costs in Chapter 11 Bankruptcies (August 1998). Available at SSRN: https://ssrn.com/abstract=113470 or http://dx.doi.org/10.2139/ssrn.113470

Robert M. Lawless (Contact Author)

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance ( email )

214 Middlebush Hall
Columbia, MO 65211
United States
573-882-6272 (Phone)
573-884-6296 (Fax)

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