Direct Costs in Chapter 11 Bankruptcies

This paper makes the first attempt at a comprehensive and general assessment of chapter 11 costs. The findings are based on a random sample of 118 case files from six federal judicial districts. The data was collected by hand through reading of individual files. We find that chapter 11 costs appear to be of a relatively low magnitude. In the median chapter 11 case, costs consumed 4.7% of distributions to all creditors or, stated alternatively, 3.5% of total assets listed at filing. The paper also informs a theoretical debate about the efficiency of secured credit. Our results suggest that secured credit can create efficiencies by lowering chapter 11 costs. Unsecured creditors also appeared to be receiving significant recoveries. At the same time, we also find evidence that secured credit may result in wealth transfer that decrease firm value. From a bankruptcy-costs perspective, secured credit appears to be a net gain for the firm. We stop short, however, of an unqualified endorsement of secured credit. Although secured credit may lower chapter 11 costs, it also may have pernicious, unmeasured effects on firm value