This paper examines bankruptcy costs using market prices of equity and put options during the financial crisis. Our approach avoids the usual selection bias and does not require the optimal tradeoff theory of capital structure to hold. We therefore can test this theory and we find strong support. We also identify significant variation in bankruptcy costs across and within industries and relate these to specific firm characteristics. Asset volatility, growth options, and labor intensity have significant positive impacts to bankruptcy costs, while tangibility, size, weak corporate governance, entrenched management, defined benefit pension plans, and inefficient asset utilization have negative impacts.