Bankruptcy bargaining with outside options and strategic delay

Abstract

This paper compares the bargaining process in conventional Chapter 11 arrangements with one alternative structure, known as “prepacks”. In prepacks, unsecured creditors' payments depend only on the value of the outside option, which is given by the liquidation value of their claims. In conventional Chapter 11s, unsecured creditors' outside option is smaller, but they additionally obtain a percentage of the remaining firm value, which compensates for the higher bankruptcy costs in these cases. It is shown that the presence of asymmetric information can lead to situations of extended bargaining, requiring further plans of reorganization before an agreement is reached. Claimants placing a low value on a firm are more likely to delay producing a plan of reorganization that would be immediately accepted.