Resolution of Financial Distress: Debt Restructurings via Chapter 11, Prepackaged Bankruptcies, and Workouts

This paper examines empirically a comprehensive sample of firms undertaking Chapter 11 reorganizations, prepackaged bankruptcies, and workouts. We provide evidence that the restructuring decision depends on the degree of the firm's leverage, the severity of its liquidity crisis, the extent of creditor's coordination, and the magnitude of its economic distress. The results complement theoretical models of debt restructuring choices. We find that economically distressed firms file for Chapter 11, while economically viable firms prefer workouts. Further, prepackaged bankruptcies are used by firms that are economically viable but face immediate liquidity problems.