Resolution of financial distress under Chapter 11

This paper examines the reorganization process under Chapter 11 of the U.S. bankruptcy code. We model the strategic interaction between claimants under Chapter 11 as a multiple-stage costly bargaining process, and solve it in a game theory setting. Using a structural framework, we show that our model generates reorganization or liquidation outcomes. We find that these outcomes are affected by the characteristics of the firm and of the negotiation game: the likelihood of a liquidation outcome increases with the probability of the bankruptcy Judge intervention, asset volatility, length of negotiation process, and bankruptcy costs, while the expected duration of the reorganization process increases with asset volatility and decreases with bankruptcy costs