Get in Line: Chapter 11 Restructuring in Crowded Bankruptcy Courts
62 Pages Posted: 3 Oct 2012 Last revised: 22 Dec 2016
Date Written: December 21, 2016
Bankruptcy costs depend not only on the laws that govern financial distress but also on the ability of the court to rehabilitate distressed firms. This paper tests whether Chapter 11 restructuring outcomes are affected by time constraints in busy bankruptcy courts. Using the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act as an exogenous shock to caseloads, I find that commercial banks report lower charge-offs on business lending when court caseloads decline, suggesting that the costs of financial distress are lower in less-congested courts. Further, court caseload affects how restructuring takes place. Less-busy bankruptcy judges liquidate fewer small firms, but more large firms. When caseload declines, large firms spend less time in court and firms that are dismissed from court are less likely to re-file for bankruptcy. In addition, firms are less likely to sell assets or obtain debtor-in-possession financing in less-busy courts.
Keywords: Financial distress, bankruptcy, Chapter 11
JEL Classification: G30, G33, G34, K22
Suggested Citation: Suggested Citation