Direct Cost and Indirect Cost of Bankruptcy

Topic 

Direct Cost and Indirect Cost of Bankruptcy

Instructions 

1. Distinguish between direct and indirect costs in corporate bankruptcy.
2. Describe agency costs and their impact on bondholders.
3. Explain the application and implications of the pecking-order theory

Answer Preview 

There is a distinct difference between the direct cost and indirect cost of bankruptcy. The direct cost of bankruptcy is costs that lead to the filing of bankruptcy in a business. These include costs such as legal costs, accounting costs, and loss of tax benefits which a business incurs in order to liquidate its assets. On the other hand, indirect costs are costs associated with distress. These costs hurt businesses based on filing the bankruptcy and the effects such as loss of creditors, loss of employees, loss of lenders, and loss of trust with customers (Jordan (2016)).

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