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08 December 2006



Very interesting article. I wish I could offer some insight as the above commentors did, but honestly I have none beyond whats been mentioned. Maybe small business owners just don't have the know how to file, or maybe they're afraid it'll hurt them in the future.


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Michael Judkins

I'm trying to gather statistics/information on the number of home improvement companies that failed in the US. Information on the financial status of existing companies affect thier perfomance, so information on that would be helpfull too. Can you help me gather any info??? Thanks Mike.
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Tanner Jones

Professor Morrison:

Why aren't the junior creditors bidding against the owners at these auctions?

If this is in fact occurring, it would seem to be in their best economic interests to bid-- at least up to the value of the unsecured debt. I am not familiar with bankruptcy law, but the most efficient solution would seem to be for the unsecured creditor or a group of unsecured junior creditors to bid on the assets, at least up to the amount of unsecured debt, and then simply trade the unsecured debt for payment.

It seems as though a legal requirement of notice of auction to junior creditors, if such a requirement does not exist now, would be a more efficient setup. Perhaps such a requirement exists in some state laws or not others. Or perhaps junior, unsecured creditors have significant barriers to cooperating with one another. Empirical research appears needed on this point.

Dennis E. Quaid

Several reasons explain the use of "state insolvency laws" in preference (pun intended) to federal bankruptcy law. The author correctly states that state procedures are faster, cheaper and more private, allowing "deals" to be consummated without the knowledge or opportunity for opposition of unsecured creditors.

But there are other significant factors that are more important. First, bankruptcy filings follow the economy, not the default provisions on the computerized wordprocessing programs. Lenders virtually ceased lending after 9/11/2001, resulting in far fewer mistakes to wind up in the bankruptcy system. Furthermore, our economy has seen an explosion of liquidity which serves to re-finance almost any mistaken loan and company. While the degree of liquidity is now falling, it has given a second or even third life to many potential debtors, thereby keeping these businesses out of court.

Finally, these is the cost differential between a private or state procedure and chapter 11. For professional fees, the differential can be between $25,000 to $500,000. Many of the small to medium businesses cannot afford the cost of chapter 11 (and may not even owe as mush as the fees!). Therefore, cheap is good. Add to the cost the dismal record of rehabilitating busseses in chapter 11, at maybe 10% (20% if you are optimistic), and you can see that a $500,000 bet for a 20% chance of winning is a bad bet. Considering (as the author correctly states), that most of these businesses are really sole proprietorships wherein the owner wants to avoid or minimize his/her own exposure to liability FIRST, before saving the company, and the cost factor often becomes the deciding factor.

m. hedayat


i agree with Mr. Henderson's comment. systems don't change that fast or that much without external and extraordinary forces acting on them. the inquiry is therefore whether the underlying data reflects true change or is itself the subject of new collection and calculation methods.

consider for example that business bankruptcies at the micro level are often redundant, hence seldom worth filing. many times private corporations are just glorified sole proprietorships: the corporate shell might as well not exist because entrepreneurs are forced into personal liability so the fledgling entity can obtain credit. the result: a landscape littered with "out of business" signs and personal, but few business, filings -- instead of taking the business down everyone simply takes their marbles and goes home (or on to the next adventure).

finally, i allude to your post on my bankruptcy blog at http://dcbabk.wordpress.com/. hope you don't mind the reference.

William Henderson

Ed, this is a fascinating theory. In this case, I would be inclined to conduct some interviews with members of the bankruptcy bar, or counsel for banks who deal with small business loans.

On a more macro level, I find it odd that the current state and federal insolvency law operates in such a large empirical vacuum. It is hard to argue policy when some basic facts remain unknown, such as why Chap 11 biz filings are trending down. Presumably the changes that are taking place are benefiting repeat players. Indeed, courts and bureaucrats might be happy with the reduced workload. Why ask hard questions when things are trending your way?

So opening the lid on this area strikes me as important.

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