The Bankruptcy System's Chapter 22 Recidivism Problem: How Serious is it?

26 Pages Posted: 14 Jan 2015

See all articles by Edward I. Altman

Edward I. Altman

New York University (NYU) - Salomon Center; New York University (NYU) - Department of Finance

Ben S. Branch

University of Massachusetts Amherst - Isenberg School of Management

Date Written: January 2015

Abstract

This paper is adapted from the keynote address from the Eastern Finance Association's 2014 meeting in Pittsburg, Pennsylvania. We highlight a recidivism problem: about 15% of debtors who emerge as continuing entities under Chapter 11, or are acquired as part of the bankruptcy process, ultimately file for bankruptcy protection again (18.25% when considering only those firms which emerge as a continuing, independent entity). We argue that the “Chapter 22” issue should not be dismissed by the bankruptcy community just because no interested party objects during the confirmation hearing. Applying the Z”‐Score model to a large sample of Chapter 11 cases reveals highly different and significant expected survival profiles at emergence. Credible distress prediction techniques can effectively predict the future success of firms emerging from bankruptcy and be used by the bankruptcy court to assess the feasibility of the reorganization plan, a requirement mandated by the Bankruptcy Code. Branch reviews, discusses, and critiques in this follow‐up article to Altman's original thesis.

Keywords: Chapter 11, Chapter 22, reorganization, feasibility, Z‐Scores

JEL Classification: G32, G38

Suggested Citation

Altman, Edward I. and Branch, Ben S., The Bankruptcy System's Chapter 22 Recidivism Problem: How Serious is it? (January 2015). Financial Review, Vol. 50, Issue 1, pp. 1-26, 2015, Available at SSRN: https://ssrn.com/abstract=2549322 or http://dx.doi.org/10.1111/fire.12058

Edward I. Altman (Contact Author)

New York University (NYU) - Salomon Center ( email )

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New York University (NYU) - Department of Finance ( email )

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Ben S. Branch

University of Massachusetts Amherst - Isenberg School of Management ( email )

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