Abstract
This paper provides a survey of much of the academic literature on the resolution of financial distress. Firms tend to resolve their financial difficulties through one or more of the following mechanisms: (1) asset sales, (2) equity issues, (3) merger with a healthy firm, (4) voluntary reorganization of the financial claims, and (5) formal bankruptcy. While most financially distressed firms sell assets, equity holders are typically unwilling to provide new equity capital. Private debt restructurings appear to be faster and less costly for the firm compared to a formal bankruptcy proceeding. Out-of-court restructurings occasionally. fail, however, reflecting fre-rider problems, information asymmetries or conflicts of interest between the firm's claimants. Moreover, firms frequently lower their bankruptcy costs by filing pre-negotiated "prepackaged" bankruptcy petitions.