Two themes dominate traditional accounts of Chapter 11 bankruptcy reorganization in the United States. First, managers or equity holders, or both, control the reorganization process. This is made possible by debtor-friendly features of the US Bankruptcy Code and judges who are passive or biased in favor of continuation. Exploiting the court’s protection, managers can entrench themselves and equity holders can extract concessions from creditors in the form of deviations from absolute priority. As a result, courts may permit reorganizations of firms that should liquidate. The second theme, usually implicit in the literature, is that creditors act as a unified constituency, usually in agitating for a quick liquidation. Together, these traditional themes continue to influence the academic literature in many areas related to financial distress.
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