Cram Down in Bankruptcy Proceedings
February 12, 2025
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In the previous article, we have studied about how some companies have started using bankruptcy strategically. This means that they use bankruptcy to discharge some of their debts if they are unable to meet their financial obligations. However, it needs to be understood that this discharge of debt does not happen without a cost. There is a wide variety of costs that are commonly associated with bankruptcy proceedings. Some of the costs related to bankruptcy have been mentioned in this article.
There are many costs which are incurred by companies that file for bankruptcy. However, these costs cannot be directly attributed to bankruptcy. Some of the costs mentioned are as follows:
In order to decide whether or not to file for bankruptcy, companies conduct several analyses. One such analysis is wherein the company checks whether the costs of bankruptcy are less than the benefits which would accrue as a result of filing bankruptcy.
In such cases, companies often calculate their cost of bankruptcy using a probabilistic formula. This means that they multiply the expected total cost of bankruptcy with the probability of filing for bankruptcy. This means that if the cost of bankruptcy is $100 million and there is a 20% chance that the company will file for bankruptcy, the expected cost can be considered to be $20 million. The benefits that accrue as a result of filing for bankruptcy must be more than $20 million in this case in order to make the exercise worthwhile.
The bottom line is that there is a wide variety of costs that are commonly associated with filing for bankruptcy. These costs must be carefully considered before making a decision.
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