(Un)secured debt and the likelihood of court-supervised reorganization

Abstract

Secured and unsecured creditors engaged in a bankruptcy process have different preference on the issue of financial distress. Secured creditors generally prefer liquidation whereas unsecured creditors tend to promote firm’s reorganization. As a consequence, secured creditors might be an obstacle to reorganization when all classes of creditors have to vote to approve the reorganization plan. To complete this analysis, we study the link between bankrupt firm’s capital structure and the likelihood of reorganization when bankruptcy Courts (instead of creditors) decide whether or not firms are reorganized. Our main result is that the reduction of secured creditors’ influence on the reorganization process might constitute a means to promote bankrupt firm’s reorganization. More generally, the paper analyses the link between the amounts/numbers of both secured and unsecured claims and the final issues of a Court-supervised reorganization process.