Summary: The sample of observed defaults understates the average firm's expected cost of default due to a sample selection bias. Because credit markets price default costs, firms faced with higher costs optimally choose lower leverage, reducing the probability of default. To quantify this selection bias, I embed a dynamic capital structure model in an economy with heterogeneous firms and time macroeconomic conditions. Using the model's implications for observable moments, I estimate the unobserved distribution of expected default costs. I find that the average firm expects to lose 45% of firm value in default, a cost much higher than existing estimates from observed defaults. However, the average cost of default in the sample of simulated defaults is only 25%, a value consistent with the existing empirical estimates. The estimated model is successful in reconciling the levels of leverage, credit spreads, and default rates observed in the data. Additionally, I characterize the determinants of the estimated firm-specific default costs.