The net payoff to creditors in formal bankruptcy may be low in present value terms because:

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All of the listed factors contribute to the potential low net payoff to creditors in formal bankruptcy. The complicated financial structure involving multiple types of creditors can make the distribution of assets complex and drawn out, leading to high administrative costs. Indirect costs, such as lost revenues and poor maintenance, can further reduce the overall value of the bankruptcy estate. Additionally, stopping pre-bankruptcy interest on unsecured debt may benefit shareholders but is detrimental to creditors, further lowering their net payoff.

The Net Payoff to Creditors in Formal Bankruptcy May Be