Chapter 11 Duration, Preplanned Cases, and Refiling Rates: An Empirical Analysis in the Post-BAPCPA Era

The Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”),[1] enacted in 2005, has been the subject of extensive commentary over the effects that the Act might have on the chapter 11 landscape and the debtor’s reorganization chances.

In my article, “Chapter 11 Duration, Preplanned Cases, and Refiling Rates: An Empirical Analysis in the Post-BAPCPA Era,” I use multivariate regression models to examine empirically and quantify, for the first time, BAPCPA’s effect on three distinct aspects of the chapter 11 process: (a) the duration of traditional chapter 11 cases; (b) the use of preplanned bankruptcies, that is, prepackaged and prenegotiated cases;[2] and (c) debtor refiling rates. My study shows that BAPCPA fulfilled, on the one hand, a long-standing desire of having shorter business reorganization cases, but on the other increased the proportion of debtors that have to refile for bankruptcy soon after exiting their previous filing.

Indeed, BAPCPA reduced the length of chapter 11 cases by amending and enacting several provisions that had the effect of accelerating the chapter 11 reorganization process, and encouraging the use of the inherently quick preplanned cases. As Table 1 below indicates, the average duration of reorganization cases dropped from 480 days to 261 days in the post-2005 era. Further, the proportion of companies undergoing preplanned bankruptcies rose to 58%, that is, 23 percentage points up from the corresponding pre-BAPCPA proportion.

Table 1: Chapter 11 Duration and Prepackaged and Prenegotiated Cases Before and After BAPCPA
Two-tail t-test comparing the mean in duration (measured in days), as well as the proportion of prepackaged and prenegotiated cases before and after the enactment of BAPCPA.   The upper cell is split in order to reflect the figures corresponding to the BAPCPA and post-BAPCPA period respectively.
Chapter 11 Duration Prepackaged & Prenegotiated Bankruptcies
Mean/Proportion 480 261 35% 58%
P-value 1.38773E-06 5.08609E-05

Statistically significant at the 1% level

Multivariate regression models controlling for various factors, including the companies’ pre-filing profitability, liquidity, and leverage confirmed that BAPCPA is correlated at a statistically significant level with shorter chapter 11 duration and more preplanned bankruptcies. Indeed, as Table 2 indicates, BAPCPA was correlated with a decrease in time within reorganization at the statistically significant level of 1%. Similarly, BAPCPA was correlated at the statistically significant level of 1% with the increased use of prepackaged and prenegotiated bankruptcies.

Table 2:   BAPCPA’s Effect on Duration and Prepackaged & Prenegotiated Bankruptcies
This table displays BAPCPA’ s effect on chapter 11 duration and prepackaged and prenegotiated cases after controlling for various factors, including the companies’ pre-filing profitability, liquidity, and leverage.
Chapter 11 Duration Prepackaged & Prenegotiated Bankruptcies
Coefficient -180.299 0.9
P-value <10-8 0.04%

Statistically significant at the 1% level.

Naturally, speedy reorganization cases are advantageous in various respects. The debtor is able to return to normal operations much faster, thereby avoiding the reputational harm that a protracted stay in chapter 11 might entail. More importantly, the shorter the chapter 11 case is, the less are the costs associated with it, leaving more value available for distribution to the creditors.

The downside, however, is that reorganization cases that are too quick do not allow the debtor to effectuate a thorough restructuring. Instead, the debtor has merely enough time to effectuate a deleveraging of its balance sheet, without addressing core operational and structural problems that would allow it to exit bankruptcy as a truly rehabilitated and healthy company.

Therefore, what we observe in the post-2005 era is companies that exit bankruptcy only to refile some time later. Indeed, as Table 3 below indicates, 48% of the companies of the sample tested refiled for bankruptcy within five years of their emergence in the post-2005 era, while the corresponding proportion for the pre-2005 period was 18%.

Table 3: Two-Tail T-test Comparing Refiling Rates Before and After BAPCPA
Two-tail t-test comparing the proportions in refiling rates before and after the enactment of BAPCPA. A company is considered to have refilled, if it filed for bankruptcy within five years since its emergence.
Refilings
Proportion 18% 48%
P-value 0.0004

Statistically significant at the 1% level

In order to examine more rigorously BAPCPA’s effect on recidivism, a multivariate regression model controlling for a number of factors, including the companies’ post-emergence profitability and leverage, was employed. As Table 4 below indicates, BAPCPA was correlated at a statistically significant level with an increase in refiling rates.

Table 4: BAPCPA’s Effect on Refiling Rates
This table displays BAPCPA’ s effect on refiling rates after controlling for various factors, including the companies’ post-emergence profitability, and leverage. A debtor is considered to have refilled, if it filed for bankruptcy within five years since its emergence.
Coefficient 3.473
P-value <10-8

Statistically significant at the 1% level.

As mentioned above, this finding suggests that the post-2005 debtor emerges from its chapter 11 proceeding hastily, effectuating only a “financial” restructuring, and a not core operational and structural one. As a result, the debtor is susceptible to another bankruptcy filing in the near future. And if one measure for successful bankruptcies is refiling rates, then BAPCPA seems to have failed in this respect.

ENDNOTES

[1] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (2005).

[2] Prepackaged and prenegotiated cases entail pre-filing negotiations between the debtor and its creditors, and thus are concluded faster than a traditional reorganization case in which negotiations start after the filing of the chapter 11 petition.

This post comes to us from Foteini Teloni. It is based on the article “Chapter 11 Duration, Preplanned Cases, and Refiling Rates: An Empirical Analysis in the Post-BAPCPA Era”, which she wrote while an Adjunct Professor and Doctoral Fellow at Fordham University School of Law and is forthcoming in the American Bankruptcy Institute Law Review. Ms. Teloni is currently a practicing attorney.