The costs incurred by a firm due to bankruptcy such as lost sales (customers become reluctant to purchase from a bankrupt firm), departure of key employees, and legal and accounting costs. The bankruptcy costs divide into direct and indirect costs (direct bankruptcy costs and indirect bankruptcy costs).

Direct bankruptcy costs include fees paid to lawyers, accountants, administrators, and investment bankers involved in bankruptcy proceedings. Indirect bankruptcy costs are not cash outlays but rather economic losses such as the loss of customers, suppliers, missed opportunities to invest in profitable ventures, loss of key employees, etc.