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The Cost of Going Broke

posted by Stephen Lubben

The NY Times is out today with a kind of obvious, yet important article making the point that the big beneficiaries from the seemingly inevitable GM bankruptcy will be the bankruptcy lawyers and other bankruptcy professionals.  As the Times notes, “legal fees totaling hundreds of millions of dollars are likely during the course of the case given the high-powered and high-fee lawyers involved.”

Of course we can be even more precise than that, using either Lynn LoPucki’s handy-dandy fee calculator, or the model I developed as part of the ABI Chapter 11 Fee Study and which I published in the American Bankruptcy Law Journal (copy available here).

Using my model – okay, I’ll admit I’m partial to it – the best prediction of the cost of GM’s case would be about $425 million.  But the 80% prediction interval -- which defines the range in which 80% of the cases would be expected to fall -- shows that under some scenarios the case could cost as much as $3.5 billion. Lots of money to be sure, but the TImes notes that GM would be the most complicated bankruptcy case ever -- and the second biggest case by asset size, only exceeded by Lehman.

Some technical notes after the jump.

These costs include all the major professionals (but not any retained under an ordinary course professionals order – I talk about these orders here) and include both debtor and committee expenses.  Assets and debt information for GM was taken from its March 2009 10-Q.

One qualification with using either model on GM rests in the unique nature of the prospective case -- it is at the far right end of the distribution of large chapter 11 debtors.  The models may be less precise with these sorts of extreme cases.


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