A new approach to valuing secured claims in bankruptcy

In a business bankruptcy in which the firm is to be preserved ar a going co ncern, one of the most difficult and important problems is valuing the asse ts that serve as collateral for secured creditors. The value of a secured c reditor's collateral is important because it affects the Payout that must b e made to the creditor at the end of the proceeding. Valuing such assets is generally thought to require either litigation or bargaining among the par ties, both of which give rise to uncertainty, delay and deviations from par ties' entitlements. We propose a new approach to valuing collateral that in volves neither bargaining nor litigation. Under this approach, a market-bas ed mechanism determines the value of collateral in a way that gives no part icipant in the bankruptcy reason to complain that secured creditors are eit her over- or undercompensated. Our approach would considerably improve the performance of business bankruptcy and could constitute an important clemen t of any proposal for bankruptcy reform.