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Bargaining around Bankruptcy: Small Business Workouts and State Law

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  • Edward R. Morrison
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    Abstract

    Federal bankruptcy law is rarely used by distressed small businesses. For every 100 that suspend operations, at most 20 file for bankruptcy. The rest use state law procedures to liquidate or reorganize. This paper documents the importance of these procedures and the conditions under which they are chosen using firm-level data on Chicago-area small businesses. I show that business owners bargain with senior lenders over the resolution of financial distress. Federal bankruptcy law is invoked only when bargaining fails. This tends to occur when there is more than one senior lender or when the debtor has defaulted on senior debt (harming trust-based relationships with lenders). These findings raise questions about the design of and need for federal bankruptcy law. (c) 2009 by The University of Chicago. All rights reserved..

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    File URL: http://www.journals.uchicago.edu/doi/pdf/10.1086/597982
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal The Journal of Legal Studies.

    Volume (Year): 38 (2009)
    Issue (Month): 2 (06)
    Pages: 255-307

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    Handle: RePEc:ucp:jlstud:v:38:y:2009:i:2:p:255-307

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    Web page: http://www.journals.uchicago.edu/JLS/

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