This paper provides a detailed descriptive analysis of multiple-plan Chapter 11 reorganizations and an empirical study of the determinants of multiple-plan adoption. In the presence of imperfect and asymmetric information multiple plans are a result of extended bargaining that facilitates the convergence of beliefs and resolution of incentives. The longer time in bankruptcy leads to costs that concern all claimants and affect recovery rates and deviations from absolute priority rules. The delay to reach a settlement is mainly due to firm valuation uncertainty, creditor coordination problems, shareholders receiving some consideration in the first plan, and presence of DIP financing.

This paper compares the bargaining process in conventional Chapter 11 arrangements with one alternative structure, known as “prepacks”. In prepacks, unsecured creditors' payments depend only on the value of the outside option, which is given by the liquidation value of their claims. In conventional Chapter 11s, unsecured creditors' outside option is smaller, but they additionally obtain a percentage of the remaining firm value, which compensates for the higher bankruptcy costs in these cases. It is shown that the presence of asymmetric information can lead to situations of extended bargaining, requiring further plans of reorganization before an agreement is reached. Claimants placing a low value on a firm are more likely to delay producing a plan of reorganization that would be immediately accepted.