Protection For Whom? Creditor Conflict and Bankruptcy

Posted: 17 Jun 2004

See all articles by Stanley D. Longhofer

Stanley D. Longhofer

Wichita State University - W. Frank Barton School of Business

Stephen R. Peters

Kansas State University - Department of Finance

Abstract

In the absence of a bankruptcy law, private debt-collection remedies generally result in an ad hoc disposal of the debtor's assets that reduces the aggregate value of creditors' claims. We show that creditors will often choose not to write private contracts that would prevent this inefficient behavior, even though these contracts would be to the mutual benefit of all creditors. Our analysis therefore provides an economic rationale for the existence of a bankruptcy law that makes a collective resolution compulsory for all creditors. We argue that such a mandate is a requisite part of any effective bankruptcy system, including proposals for market-based resolutions of insolvency.

Keywords: Bankruptcy, financial distress, Chapter 11, grab law

JEL Classification: G33, K10

Suggested Citation

Longhofer, Stanley D. and Peters, Stephen R., Protection For Whom? Creditor Conflict and Bankruptcy. Available at SSRN: https://ssrn.com/abstract=556233

Stanley D. Longhofer (Contact Author)

Wichita State University - W. Frank Barton School of Business ( email )

1845 N. Fairmount
Wichita, KS 67260
United States
316-978-7120 (Phone)
316-978-3263 (Fax)

HOME PAGE: http://webs.wichita.edu/longhofer

Stephen R. Peters

Kansas State University - Department of Finance ( email )

Manhattan, KS 66506
United States

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