Are Bankruptcy Professional Fees Excessively High?

92 Pages Posted: 31 Mar 2020 Last revised: 30 Jan 2024

Date Written: January 28, 2024

Abstract

Chapter 7 is the most popular bankruptcy system for U.S. firms and individuals. Chapter 7 professional fees are substantial. Theoretically, high fees might be an unavoidable cost of incentivizing professionals. I test this empirically. I study trustees, the most important professionals in Chapter 7, who liquidate assets in exchange for legally-mandated commissions. Exploiting kinks in the commission function, I estimate a structural model of moral hazard by trustees. I show that a policy change lowering trustee fees would harm trustee incentives, reducing liquidation values. Nonetheless, such a policy would dramatically improve creditor recovery, increasing small-business-lender recovery by 15.7%.

Keywords: bankruptcy, recovery rate, structural estimation, bunching, moral hazard

JEL Classification: G33, G38, K22

Suggested Citation

Antill, Samuel, Are Bankruptcy Professional Fees Excessively High? (January 28, 2024). Available at SSRN: https://ssrn.com/abstract=3554835 or http://dx.doi.org/10.2139/ssrn.3554835

Samuel Antill (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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