- Harvard researcher finds that Chapter 11 bankruptcy proceedings tend to end in liquidation even though reorganization is more likely to be profitable to creditors
- Analysis of more than 500 proceedings over three decades determines that creditors lose more than $2 billion a year by not pursuing a restructuring strategy
- Chapter 11 bankruptcy is more accessible to small businesses following 2019 legislation
Summary by Dirk Langeveld
A Harvard researcher finds that creditors have lost billions of dollars each year by pursuing liquidation of businesses in bankruptcy proceedings instead of restructuring.
Samuel B. Antill, assistant professor at the Harvard Business School, looked at the Chapter 11 bankruptcy proceedings of 503 non-financial companies between 1987 and 2018. Each company was carrying more than $50 million in debt at the time of their default.
Antill found that bankruptcy court judges tended to favor liquidations over reorganization, in part because senior creditors tend to have outside managers who favor a faster resolution via liquidation rather than the lengthier process of restructuring. However, he determined that 60 percent of liquidations would have netted creditors more money if they had been restructured, resulting in losses to the tune of more than $2 billion each year.
Chapter 11 bankruptcy protection allows a business to take steps such as consolidating debts that would otherwise weigh on their profit margins, changing leadership, eliminating unprofitable assets or contracts, and updating business operations to be more profitable. This potentially presents a win-win situation in which the business is able to resume sustainable and profitable operations while the creditor recovers the bulk of the money it is owed and gains a stake in the company that could prove valuable over time.
This bankruptcy process is available to businesses that have some income but not enough to meet their debts, and has traditionally been open more to large companies. Smaller businesses were more likely to pursue Chapter 7 liquidation bankruptcy, which is designed for those that don’t have money available to pay their creditors.
However, the 2019 Small Business Reorganization Act opened up more opportunities for small businesses to reorganize under Chapter 11 bankruptcy. Antill says this legislation is especially pertinent as small businesses face challenges in recovering from the initial blow of the COVID-19 pandemic as well as the potential risks created by the spread of the Delta variant of the virus.
Antill recommends that small businesses looking to reorganize under Chapter 11 meet with creditors to seek initial support for this process. Any reorganization must be agreed to by the creditors as well as the bankruptcy court. Businesses must meet a variety of obligations under a restructuring plan, and creditors can still pursue liquidation if these conditions are not met.