Bankruptcy is basically of the two types:
a. Bankruptcy for the purpose of protection. Such bankruptcy is filed under the provisions of chapter 11 and allows for the reorganization of the business.
Such bankruptcy is less likely to be successful if a high degree of operating leverage is the cause of distress for the company. Because the financial leverage can be controlled by reorganizing the terms with the creditors and changing the capital structure. However, the management does not have much control over the operating leverage.
b. Bankruptcy for the purpose of liquidation. Such bankruptcy is filed under the provision of chapter 7.
While liquidating, the obligations of the debt providers are cleared prior to the equity owners. Thus, a high degree of financial leverage, in most cases, reduces the amount of liquidating dividends (assuming distress is the main reason for liquidation).