Financial distress and bankruptcy

Companies can run into financial distress caused by different reasons. Either internal or external influences can drive a company into a strategic, an earnings crisis or even worse into bankruptcy. Company crisis can threaten the existence of a company or crisis can have the potential to destroy a company. The literature knows four generic terms, sometimes used interchangeable, for financial distress: bankrupt, default, failed and insolvent. As soon as a company is facing financial distress, financial distress costs arise. These costs can be separated into direct bankruptcy costs and indirect bankruptcy costs. Direct bankruptcy costs are clear and easy to measure, indirect bankruptcy costs are subject to estimations and calculations based on statistical information and benchmarks. The sum of the potential bankruptcy costs influences also the optimal capital structure of the company. There are four dimensions for financial restructuring to focus on - Asset restructuring, restructuring of the ownership structure, change the corporate leverage or restructure the companies equity.