Corporate bankruptcy, often seen as a time of crisis, can reveal sophisticated strategies to keep companies operating with debt relief. In the context of Chapter 11, provided for by the US Federal Bankruptcy Code, some organizations use the legislation as a strategic tool. In this way, they exploit loopholes to reduce financial burdens and preserve their operations. This study, published in Revista Abacus by André De Moura (FGV EAESP), Jairaj Gupta and Maria Barzotto, analyzes how and why companies act in this way, with implications for creditors, regulators and public policies.

The research used data from the UCLA-LoPucki Bankruptcy Research Database (BRD) and the Compustat financial database. Using data from more than 500 bankruptcy filings and nearly 400 successful judicial reorganizations between 1994 and 2019, the researchers built a predictive model on the survival of companies in bankruptcy. Some of the factors analyzed included leverage, governance, judicial context and macroeconomic conditions.

Strategic Bankruptcy: how companies restructure debts in a planned way

The results indicate that companies begin to adjust their debt structure one to four years before declaring bankruptcy. Therefore, they adopt an anticipatory and strategic behavior in scenarios of financial distress. The strategy of increasing leverage allows companies to use the judicial system to reorganize their finances, transferring the burden to creditors.

The research identified ten key variables for bankruptcy success, including judge experience and CEO replacement after bankruptcy. Surprisingly, high leverage levels were associated with higher odds of emergence, while the retail sector had a lower probability of success.

Furthermore, the findings suggest the need to reform bankruptcy laws to limit strategic abuse. Proposals include restricting access to certain legal provisions, increasing the cost of filing a lawsuit, and requiring more stringent repayment plans.

This behavior not only affects creditors, but also challenges the traditional perception that bankruptcy results exclusively from financial distress. Therefore, regulators and courts need to balance the incentive for operational continuity with the protection of creditors’ rights.

Thus, the study by Gupta, Barzotto and De Moura reveals that bankruptcy, far from being just a sign of corporate misery, can be a carefully planned strategic tool. Therefore, reforms in the bankruptcy system are essential to mitigate abuse and ensure greater equity between companies and creditors.

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