Bankruptcy in Firms

Bankruptcy is an extensive process on various levels. The cost of bankruptcy to a firm comes in two different ways; direct and indirect. Direct costs include any lawyer and accountant fees; things of that nature. Indirect costs come in the form of lost sales and profits, as well as a limitation on the firm’s credit, which greatly reduces its potential for growth.
Firms must realize that the threat of bankruptcy is relevant and is an important ingredient in its financial decisions, but there should be a cost-benefit analysis must be made for a firm to understand what the cost of bankruptcy to their company truly is. There is also the matter of the bankruptcy trustee’s ability to take over the company which could prove not to be in the companies best interest.



By: Matt Smith


Sources:
http://www.jstor.org/pss/2327613

http://www.simon.rochester.edu/fac/warner/Jerry%20Papers/JF-May%2077.pdf