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August, 2014

SECURED CLAIMS IN BANKRUPTCY: Reduced Use of Covenants 3

In discussing full priority’s effect on the use of covenants in loan arrangements, we abstracted from the level of the creditor’s enforcement efforts—the activities the creditor undertakes to ascertain that the borrower is complying with its contractual commitments. However, a …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: Reduced Use of Covenants 2

In a perfect world in which the terms of other creditors’ arrangements fully reflect the consequences to them of all of the elements of the arrangements into which the borrower enters, the two parties would have an incentive to adopt …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: Reduced Use of Covenants

Reduced Monitoring by Secured Lenders Under Full Priority A potentially large efficiency cost of according foil priority to secured claims is that foil priority reduces the incentive of the secured creditor to “monitor” the debtor, that is, attempt to prevent …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: Use of Security Interests Under Full Priority 2

Next consider borrowers as a class. To the extent that adjusting and sophisticated nonadjusting creditors charge higher interest rates to reflect the risk of loss due to the creation of value-wasting security interests, borrowers’ profits are reduced. Link Note that …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: Use of Security Interests Under Full Priority

In Section A, we explained that there are four classes of nonadjusting creditors that cannot or do not adjust the size of their claims against the borrower to take into account the borrower’s arrangements with other creditors, including the use …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: Empirical Evidence That Security Interests Are Often Inefficient 3

If the lender and the borrower were the only parties affected by the arrangement, the existence of a negative pledge covenant would suggest that the covenant is efficient, and, therefore that the creation of the security interests prohibited by it …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: Empirical Evidence That Security Interests Are Often Inefficient 2

However, the failure of a lender to incorporate a security interest into its loan arrangement with a borrower does not prove that a security interest would have been value-wasting because the creation of a security interest, even under a rule …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: Empirical Evidence That Security Interests Are Often Inefficient

We have shown that parties might create security interests even if they are inefficient. The pending question is whether there are many cases in which security interests actually are inefficient. In this Section, we present empirical evidence that indicates that …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: Can Disclosure by Borrowers Eliminate the Problem of Excessive Use 2

Moreover, notification is unlikely to be able to cost-effectively reduce nonadjustment (and, therefore, the absence of notification is not likely to indicate that the magnitude of nonadjustment is small) for creditors with small claims that could in principle adjust the …Continue reading →

SECURED CLAIMS IN BANKRUPTCY: Can Disclosure by Borrowers Eliminate the Problem of Excessive Use

In his symposium paper, Alan Schwartz makes the point that although it may not be worthwhile for creditors with small claims to determine whether a borrower has created security interests that would subordinate their claims in the event of bankruptcy, …Continue reading →

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