Chapter 11’s Renegotiation Framework and the Purpose of Corporate Bankruptcy

62 Pages Posted: 3 Apr 2019 Last revised: 29 Dec 2020

See all articles by Anthony Casey

Anthony Casey

University of Chicago Law School; European Corporate Governance Institute (ECGI)

Date Written: March 16, 2019


A fundamental question for corporate bankruptcy law is why it exists in the first place. Why are there special rules that apply only in financial distress? The conventional law-and-economics answer—known as the Creditors’ Bargain Theory—identifies two core purposes of bankruptcy law: recreating a hypothetical ex ante bargain and respecting creditors’ nonbankruptcy entitlements.

This Article challenges the Creditors’ Bargain Theory and presents an alternative: The sole purpose of corporate bankruptcy law is to solve the incomplete contracting problem that accompanies financial distress. Because financial distress is difficult to contract over, relationships involving a distressed firm are governed by incomplete contracts that allow parties to hold each other up. All distressed firms face this same value-destroying hold-up problem, and so pressure arises for a uniform solution. The purpose of corporate bankruptcy law is to provide that solution.

In the United States, Chapter 11 of the Bankruptcy Code implements this purpose in the form of a framework for ex post renegotiation of incomplete contracts. This framework imposes judicial oversight and allocates bargaining power to minimize hold up among those with interests in a distressed firm. In a sense, it puts in place guardrails that give the parties room to bargain while keeping them from engaging in extreme forms of hold up. While this framework is not based on any hypothetical ex ante bargain and gives no special deference to nonbankruptcy entitlements, it is the fundamental attribute of Chapter 11.

Keywords: bankruptcy, corporate reorganization, chapter 11, creditors' bargain, corporate law, incomplete contracts, negotiation

Suggested Citation

Casey, Anthony, Chapter 11’s Renegotiation Framework and the Purpose of Corporate Bankruptcy (March 16, 2019). 120 Columbia Law Review 1709 (2020), Available at SSRN: or

Anthony Casey (Contact Author)

University of Chicago Law School ( email )

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Chicago, IL 60637
United States
773.702.9578 (Phone)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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