Originally Posted by
ethernal
This seems to be a common thread - that bankruptcies are somehow "good" and that they will be done early and often. That is an incorrect assumption, if only because the owners (equity holders) would never allow it. Existing equity owners are essentially the least senior debt holders. This means that they are either completely wiped out, or if they retain a stake, are heavily diluted (often on the order of 80-90%+).
When viewed from this lens, there is no incentive to declare bankruptcy while there is still a chance of recovery - or even if there isn't. The end outcome for the owners is the same.
That lens is somewhat narrow, but a good reminder that bankruptcies aren't always "early and often" with a "good result." Broadening your lens, there are other very important items to consider.
1) If things are spiraling in the unpleasant direction, the risk of a creditor pool filing an involuntary Bankruptcy petition, or moving for the appointment of a receiver are real. If the company files its own Chapter 11, it can attempt to control the show, at least for a certain time period, and may have some of the creditor pool already onboard with its proposed plan of reorganization.
2) If things are in the "zone of insolvency" and the directors and officers act in a manner not in the interests of the creditor pool and drive (or as the case may be, fly) the company into hopeless disrepair without any chance of reorganization, they better have the D&O liability carrier on the horn.