A Tangible Solution for Testing Plan Feasibility : <I>Reader's Digest</I> Version

In this article, I explore potentially significant links between tangible insolvency, leverage and firm failure and what they might mean for the Chapter 11 plan confirmation process and feasibility testing. My preliminary analysis confirms that debtors emerging with tangibly insolvent and overleveraged balance sheets are significantly more likely to fail or refile. My analysis also links firm failure with the fresh start accounting rules. I argue that the rules facilitate overleverage at emergence by allowing firms to increase their illiquid, intangible assets on their balance sheets during plan confirmation. These intangibles hide the fact that firms' liabilities are high in proportion to or exceed firms' tangible assets, making firms more likely to fail in the future. Given these findings, courts may consider: 1) calculating a debtor's tangible equity, 2) analyzing leverage ratios during plan confirmation, and 3) requiring each debtor to break out goodwill, deferred-tax assets and other intangibles on their pro forma balance sheets