While the exact magnitude of financial distress costs varies depending on the company’s specific circumstances, there is no question that Chapter 11 devalues a company, absent extraordinary circumstances. As an increasing number of companies filed for bankruptcy last year seeking to get a fresh financial start, finance leaders should think twice if they want to continue over the long haul as a going concern.

When a company is in financial distress, CEOs, CFOs and their attorneys have to decide whether to settle with creditors out of court or commence a Chapter 11 case. Similarly, in the case of an already bankrupt firm facing lengthy litigation, at some point executives may need to consider cutting their losses and settling. In either scenario, businesses should not take these actions without fully weighing a settlement’s indirect soft costs and benefits.

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