Bankruptcy Spells Death for Too Many Businesses


By Rachel Layne

Chapter 11 bankruptcy protection is supposed to allow companies to shed debt and get a fresh start. Ideally, creditors recover most of what they’re owed as the restructured firm begins turning a profit.

Yet, more companies are liquidated than rebuilt, giving up the second chance at success that the law aims to encourage. In the process, these liquidations ultimately shortchange creditors by billions of dollars a year, according to new research by Harvard Business School Assistant Professor Samuel B. Antill, who studied three decades of court filings.

“Chapter 11 allows for reorganization, which sounds like such a great thing. People get to keep their jobs, the creditors get paid equity, and the customers don't lose this business that they loved,” says Antill, whose article Do the Right Firms Survive Bankruptcy? will appear in a forthcoming issue of The Journal of Financial Economics.

At a time when the COVID-19 pandemic has hit many companies hard—some to the point of considering bankruptcy—Antill’s research findings may help business leaders make important decisions to avoid the high price of liquidation and choose a sensible path forward.

Liquidation runs rampant

Using case information from, Bloomberg Law, Moody’s Investors Service, and the Federal Reserve Bank of St. Louis, Antill studied 503 nonfinancial companies, each carrying more than $50 million in debt at the time of default between 1987 and 2018.


Because the data includes judges’ names on individual filings, Antill was able to determine how specific jurists ruled. He focused on companies that sought bankruptcy under Chapter 11, the approach that large companies seeking to reorganize or liquidate tend to favor.

Prior to analyzing the court rulings, Antill expected bankruptcy judges to favor reorganization over liquidation. “Instead, I was surprised to see that, in fact, it's the other way around. There's excessive liquidation in the US bankruptcy system,” he says.

Managers push for liquidation

One reason for the trend? Senior creditors typically hire external managers to guide a company through Chapter 11. But instead of reorganizing, the manager often persuades the judge to approve a speedy asset sale. By prioritizing a fast resolution over a beneficial reorganization, managers can steer firms into liquidations that harm junior creditors, employees, and customers.

Under Section 363 of the US Bankruptcy Code, judges may grant that request without creditor consent if managers present a “business justification” for the move, like falling values for everything from furniture to the firm itself.

“There are some instances where you have a melting ice cube and assets in bankruptcy that are losing value really quickly. It’s ‘if we don't do the sale right now, there's not going to be any value left in this firm,’” Antill says. “[Managers] just need the judge to believe there's some business justification, and then they can make this whole sale happen in, like, 30 days.”


Restructuring is less costly

Rushing the process may be short-sighted for companies and creditors, costing both parties more in the long run, the research shows. Antill points to Sears—the most expensive retail bankruptcy in history—as an example of value lost through hasty asset sales.

According to Antill’s analysis, creditors would gain a potential 52 cents on each dollar owed when a company is restructured instead of liquidated.

Put another way, 60 percent of the liquidations Antill studied cost creditors more than a simulated reorganization would have. Creditors also lost more money when some bankrupt companies were acquired than they would have in a theoretical reorganization. Over time, the missed opportunities add up, with inefficient liquidations and acquisitions costing creditors more than $2 billion per year, Antill finds.


That has big implications for companies both large and small. As long as they don’t have an excessive debt load, companies emerging from bankruptcy may perform well when reorganized, a potential boon for both the firm and the creditors, Antill says.

“If you could just get all the creditors to agree to lower that debt load, to accept a write-down, then the equity in that company becomes really valuable. Because, for some of these firms, really, their only problem was that debt,” he says.

Creditors, in turn, benefit because they can negotiate equity stakes in the new firm as a form of payment for outstanding debt. That’s an asset that, if the reorganization is done right, can grow over time.

“They become partial owners of this firm, and their equity stake can be very valuable—more valuable than what the liquidation proceeds would have been, if the firm is healthy,” Antill says.

What should companies facing bankruptcy do?

Antill’s findings may be especially relevant for small-business owners facing the possibility of bankruptcy as the country emerges from the pandemic. Small businesses, especially debt-laden or distressed ones, often can’t afford the more expensive Chapter 11 filing and instead file for Chapter 7, where they have less control.

Some good news: the 2019 Small Business Reorganization Act seeks to make it easier for small businesses to reorganize under Chapter 11—something smaller companies should seriously consider, Antill says.

Before heading to court, managers considering bankruptcy should meet with key creditors to shore up support, Antill advises.

“Get them to sign some sort of restructuring support agreement, maybe even a prepackaged bankruptcy plan before filing,” Antill says. “It allows the managers and creditors that signed the agreement to take advantage of one of the coolest features of bankruptcy: You can tell some creditors, ‘I'm only paying you half of what I owe.’”

Meanwhile, creditors should be open to working more closely with management on a plan for reorganization before heading into court, especially knowing many firms are experiencing only temporary setbacks as a result of the impacts of COVID-19, Antill says.

“It's important to help creditors understand that this might be an unusual circumstance, and that if they could just be patient, accept some equity in this firm instead of liquidating the assets, that equity could be really valuable post-pandemic,” Antill says.

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