We document the distortionary effects of accounting-based regulation on reported earnings. In India only firms with negative book value of equity (networth) can seek bankruptcy protection. Using a novel dataset of bankrupt firms from India, we show that firms manage earnings downward to seek bankruptcy protection. Strengthening creditor rights reduces downward earnings management among non-group affiliated firms. There is also evidence for upward earnings management among firms with positive, but low networth in an effort to avoid bankruptcy filing. Finally, we show that pre-bankruptcy accruals are a strong signal of opportunistic bankruptcy filing. Firms with income-decreasing pre-bankruptcy accruals have worse post-bankruptcy performance. Overall, our paper highlights distortions that arise from accounting-based rules and underscores the importance of factoring economic incentives in the design of such regulation.