Can Small Businesses Survive Chapter 11?

81 Pages Posted: 12 Mar 2024 Last revised: 24 Mar 2024

See all articles by Edith S. Hotchkiss

Edith S. Hotchkiss

Boston College - Carroll School of Management

Benjamin Charles Iverson

Brigham Young University

Xiang Zheng

University of Connecticut - Department of Finance

Date Written: February 14, 2024

Abstract

A majority of small U.S. businesses attempting to reorganize in bankruptcy fail to successfully do so. Subchapter V of Chapter 11 was introduced in 2020 for firms with less than $7.5 million in total liabilities to streamline the process by reducing bankruptcy costs and negotiation frictions, and enabling entrepreneurs to retain their ownership. Employing regression-discontinuity and difference-in-differences designs, we show that many small businesses reorganize under the new procedures that otherwise would have been liquidated. Further, expected creditor recoveries are at least as high in Subchapter V as in similar small business reorganizations, and post-bankruptcy survival rates are no lower. Our results show that the increased ability to preserve small businesses is not associated with a bias toward continuing unviable firms, and that creditors are not harmed by a shift in bargaining power toward small business owners.

Keywords: bankruptcy, restructuring, small businesses, financial distress

JEL Classification: G33, G34

Suggested Citation

Hotchkiss, Edith S. and Iverson, Benjamin Charles and Zheng, Xiang, Can Small Businesses Survive Chapter 11? (February 14, 2024). Available at SSRN: https://ssrn.com/abstract=4726391 or http://dx.doi.org/10.2139/ssrn.4726391

Edith S. Hotchkiss (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Benjamin Charles Iverson

Brigham Young University ( email )

United States

Xiang Zheng

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

HOME PAGE: http://www.xiangzheng.info/

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