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Get In Line: Chapter 11 Restructuring In Crowded Bankruptcy Courts

B. Iverson
Published 2018 · Computer Science

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This paper tests whether Chapter 11 restructuring outcomes are affected by time constraints in busy bankruptcy courts. On average, total bankruptcy filings rise by 32% during economic recessions, leaving bankruptcy judges with far less time per case exactly when financial distress is worst. Using the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005 as an exogenous shock that decreased caseloads dramatically, I estimate the impact of bankruptcy caseload changes on the outcomes of firms in Chapter 11. I find that as bankruptcy judges become busier they tend to become more pro-debtor, allowing more firms to reorganize and liquidating fewer firms. This is particularly true for larger firms. Firms that reorganize in busy courts are more likely to re-file for bankruptcy within three years of their original filing. In addition, busy courts impose costs on local banks, which report higher charge-offs on business lending when caseload increases. The economic magnitude of these effects is large: the average rise in judge caseload during an economic recession results in 27% more firms being reorganized, 47% higher charge-off rates, and doubles the share of firms that re-file for bankruptcy.
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