 In perfect capital markets, risk of bankruptcy is not a disadvantage of debt. In fact, a bankruptcy is not the simple transfer of the ownership of firms' assets from its equity holders to its debt holders. In the real world, the process of bankruptcy is rarely simple and straightforward, rather it is very much complicated and longer process that transfers the assets of the firm from equity holders to its debt holders and that bankruptcy process also imposes certain costs on the firm and its investors and these are the costs that the assumptions of perfect capital market ignores. Now also note that the equity holders of the firm just not easily come to a consent of handing over the assets of the firms to the debt holders. There are two types of bankruptcy costs. The first is the direct cost of bankruptcy and second is the indirect cost of bankruptcy. So far as the direct costs of bankruptcy are concerned, the firm becomes financially distressed in case of bankruptcy, then it needs to go for hiring of certain outside professionals and that list includes the hiring of legal and accounting experts, consultants and appraisers, auctioneers and others with experience to sell the distressed assets of the firm. Even investment bankers may also assist with essential financing restructuring of the bankrupt firm. Also these outside experts become costly for the bankrupt firm. Additionally, the creditors may also need to incur certain costs during the process of bankruptcy. These direct costs of bankruptcy reduce the value of the assets of the firm's investors because the higher cost for the firms with complicated business operations, longer number of creditors, these two factors affect the bankruptcy cost of the firm to go more higher side. There is a problem with the longer number of larger number of creditors because it is more difficult to get creditors willingness on the final disposition of the assets of the firm. Now the evidence of this particular cost can be there because of two options. Option one is work out where work can be done by first negotiating directly with the creditors. The second option to control the creditors longer list is to go for the prepack. Prepack is a process where development is done in order to go for a reorganization plan with the consent of the main creditors of the firm and then this reorganization plan is implemented while pressing putting a pressure on other creditors that are trying to get some more share for for themselves. Next we have indirect cost of bankruptcy. There is a longer list of such type of cost like loss of customers. In that case, a firm away from promises to its customers may turn these customers unwilling to purchase its products that are subject to future sport services issues. Then we have loss of suppliers who are unwilling now to provide a firm with the inventory with the fear of any non-payment of their credit in the days to come. Third we have loss of employees where the firm has inability to offer job security with long term employment contracts and that may turn new hiring very much difficult for the firm or the higher cost of retaining existing employees who may quit or may be hired by other firms in the industry. Next we have loss of receivables where there is a difficult collection as customers believe that the firm will never bother because amounts are not particularly large in any individual case of receivables. Next we have fire sales of assets where the firm is forced to go for quick sale of assets to raise cash that may force a firm to accept a lower price for its assets then can be otherwise fetched under a more financially stable condition. Then we have inefficient liquidation where the management of the firm uses certain tactics that may delay the liquidation of the firm that even should be shut down more quickly. Next we have cost to the creditors that means their default of a firm with a loan being significant asset for the credit may lead to the costly financial distress for the creditors. In that particular case creditors may foresee that a significant part of their credit may not be recovered from the disposition of the assets of the firm. Now what is the overall impact of the indirect cost of bankruptcy you see that this can be very substantial cost so far as the indirect bankruptcy costs are concerned while estimating such indirect cost of bankruptcy two things need to be considered. The first is that how much loss will be there to the total value of the firm and second to measure the incremental losses due to the financial distress and that how much these additional losses may go beyond the any losses due to the firm's economic economic distress so we need to consider the incremental losses of financial distress that are in excess of the operational losses of the firm.