The Other Liquidation Decision
61 Pages Posted: 19 May 2006
Date Written: May 19, 2006
A firm's liquidation decision actually involves two decisions: the initial decision to shut down the firm and the second question of how?. In the federal bankruptcy system this second question involves a choice between chapter 11 and chapter 7. Conventional wisdom instructs that the debtor's management will always favor chapter 11 because the Bankruptcy Code mandates a trustee in every chapter 7 case, while in chapter 11 the norm is that the debtor and its management remain in possession, with the powers and obligations of a trustee. What has been little examined is how creditors fare in the choice between chapters.
To further examine the second part of the liquidation decision, I present the results of a new empirical examination of 449 firms that liquidated under chapters 7 or 11. This study is unique in that it is the first multi-district study to examine business liquidation in all its forms since the enactment of the current Bankruptcy Code in 1978.
Keywords: Bankruptcy, Liquidation, Chapter 11, Chapter 7, Financial Distress
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