 Whether private workout is a better option over a formal bankruptcy needs to weigh the benefits of both of the options. Affirm on default needs to restructure its financial claims through formal bankruptcy or private workout. These both options involve the exchange of new financial claims for the old or existing financial claims where the senior debt is replaced with the junior debt and junior debt is replaced with the equity instruments. Now there is some empirical evidence on private workouts and formal bankruptcy transactions. And half of the financial restructuring was done through private workouts. But in recent, formal bankruptcies transactions dominated firms emerging from private workouts experience more increased stock prices whereas lesser direct cost was involved and experienced in private workouts. Top management usually loses their pay and sometimes jobs in both the situations. So what is the situation of a marginal firm in these two options? A formal bankruptcy is more costly for the average firm than a private workout transaction because it allows firms to issue debt and that is called as debtor in position or DIP. This debt is made senior to all the issued current debt. This makes bankruptcy reorganization an attractive alternative to a private workout. The bankruptcy transaction also carries some tax advantages like there is no loss of tax carry forwards, the better tax treatment of the cancellation of indebtedness and the interest of bankruptcy unsecured debt stops accruing in formal bankruptcy. In holdouts, bankruptcy is better for equity investors than it is for the private creditors. Using DIP and stopping pre-bankruptcy interest on unsecured debt helps stockholders and it hurts the creditors of the firm. The consequences are that the equity investors can hold out for a better deal in formal bankruptcy. The bankruptcy option also violates the absolute priority rule favoring the creditors over the equity investors. There is a study and the findings are that 81% bankruptcy cases evidenced some compensation given to equity investors. Clearly the creditors may be forced to give up some of their seniority rights to get equity investors to agree to a deal. So in this way, these are the stockholders that get some benefit or some favor in financial claims over the claims of the creditors. In complicated capital structure it may trouble a firm putting together a private work out because firms with secured creditors usually use formal bankruptcy and the reason is that it is too hard to get an agreement with the various types of creditors. Next we know that there is some conflict of interest between the owners and the creditors and this conflict of interest will be more high if the both of the parties have incomplete information on the conditions of the financial distress of the firm. In case of a permanent cash shortfall as this is the sign of a financial distress and if the cash shortfall is permanent then the creditors would like a formal reorganization or the liquidation and if the cash shortfall is off temporarily then the equity holders will like more formal reorganization or liquidation. Now the implication of financial distress is that it will be expensive if the complexity is high and information is incomplete and if it will be cheaper if the complexity is low and information is complete.