Excerpt
August 24, 2023, Paper: "Congress gave distressed companies a powerful set of tools to deal with financial distress, namely Chapter 11 of the United States Bankruptcy Code. But these tools are thought to come with a cost in the form of damages sustained by the business, which we commonly refer to as the “indirect costs of bankruptcy.” For example, bankruptcy filings are thought to hurt the relationship between a firm and its workforce. When Hertz filed for Chapter 11 in 2020, it warned that, for the duration of the bankruptcy proceeding, “our employees will face considerable distraction and uncertainty and we may experience increased levels of employee attrition.” In other words, the design of bankruptcy law, with its highly public federal court hearings, creates a trade-off: firms may benefit from accessing the tools that Congress provided to resolve financial distress, but at the cost of, among other things, reducing the firm’s ability to retain, motivate and attract a value-maximizing workforce. As a result of this fear, among other fears of business damage, companies often delay and avoid filing for bankruptcy due to concerns that it would damage the business even if the tools of bankruptcy law might be helpful in resolving financial distress."