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Contracting About Bankruptcy

  • Alan Schwartz


    (Law School)

Creditors and the insolvent firm are required to use the state supplied bankruptcy procedure if they cannot agree on a private resolution after financial distress has occurred. While these ex post workouts are legal, parties cannot agree in the lending contracts to use a bankruptcy procedure alternative to the one the state supplies. This paper considers this legal prohibition. The paper makes three principal claims: the prohibition on contracting for preferred bankruptcy procedures exacerbates underinvestment; the prohibition should be lifted for this reason and because parties could coordinate on "bankruptcy contracts" although firms tend to have numerous creditors, who lend at different times and may have different preferences over procedures; and methodologically, that regulators should take the ability of parties to contract about bankruptcy issues into account when devising legal rules.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm71.

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Date of creation: 08 Apr 1997
Date of revision:
Handle: RePEc:ysm:somwrk:ysm71
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