The Bankruptcy Game


This is a negotiating exercise to introduce you to the dynamics of Chapter 11 of the Bankruptcy Code, which allows businesses to "reorganize" their capital structure and continue as going concerns. Typically, the debtor's management proposes a plan, the various "classes" of creditors vote on it (using complicated rules) after full disclosure and lengthy negotiations, and if approved the plan is then confirmed by the Bankruptcy Court. (Here's a link to a more detailed explanation.) Failure to adopt a plan usually results in liquidation under Chapter 7, with assets being sold off piecemeal.

The Bankruptcy Game is played in groups of three. In each group one person plays the role of Management, one plays the role of Bank Creditor and one plays the role of Trade Creditor. Roles and groups will be assigned randomly.

Facts

DealsOnWheels, Inc. marketed credit cards to used car buyers, but it recently ran out of cash, and Management has filed for bankruptcy under Chapter 11. DOW has total debts of $10 million: Bank Creditor is owed $7 million, and Trade Creditor is owed $3 million.

DOW is worth $6 million as a going concern *if and only if* DOW Management and both creditors can all agree on a plan to divide up that going concern value among themselves. The maximum share for Management is limited to 25% ($1.5 million), and the minimum is zero -- as long as everyone in the group agrees. Whatever Management does not get can be divided between Bank Creditor and Trade Creditor in any manner -- as long as everyone in the group agrees. There will be brief negotiating sessions, with a break for questions, and each group's agreed plan (if any) will be turned in on a scoresheet when negotiating time is over.

If a group is not able to agree on a plan, then DOW will go into Chapter 7. Its assets will be sold for $3,000,000, which will be divided between Bank and Trade Creditors in proportion to what they are owed (70%-30%), and Management will get nothing.

How to Win at Bankruptcy: The Object of the Game

Each player is competing against all of the players in the other groups who have the same role. The player for each role who gets the most, compared to all the others who are playing the same role, is a winner and will receive a *valuable golden prize*. In other words, the winning Manager will have negotiated a plan that gives them more than all the other Managers get, the winning Bank Creditor will have gotten more than all the other Bank Creditors, and the winning Trade Creditor more than all the other Trade Creditors. Bear in mind, however, that everyone in a group must agree if there is to be any plan at all, and no one has the power to force unwilling agreement.


Scoresheet (turn in at end)

Management Gets
$ ________
Bank Creditor Gets
$ ________
Trade Creditor Gets
$ ________
TOTAL: Must Add to
$ 6,000,000
Acceptances
initial here
Management Accepts the Plan
_____
Bank Creditor Accepts the Plan
_____
Trade Creditor Accepts the Plan
_____