Abstract
This paper illustrates how non-contractual legal rules sometimes alleviate contractual incompleteness. A serious incompleteness in debt contracts is the borrower's ability to fraudulently transfer assets to third parties, rendering the borrower insolvent. The incompleteness arises because contractual remedies are ineffective against third-party transferees who are not bound by the debt contract, while the borrower has no assets to recover. Fraudulent conveyance law is a non-contractual legal rule allowing recovery against these transferees. This increases debt capacity most dramatically for borrowers with highly liquid assets. Without non-contractual legal rules, high liquidation value implies low debt capacity. Journal of Economic Literature Classification Numbers: G32; G38.
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