Abstract
The number of bankruptcies in a specific period, and levels of debt, are well documented but little is known about the consequences of bankruptcies beyond the numbers. In this study, Dutch entrepreneurs who went through debt rescheduling after personal bankruptcy, were interviewed in order to gain an understanding of the private, personal and social implications of bankruptcy. Recently, systematic investigations of the implications of bankruptcy have been published. However, research has not yet taken the phenomenological experience of the bankrupt entrepreneur into account. Insights into these experiences are of critical importance for obtaining a comprehensive understanding of the impact of the bankruptcy process, and for engaging in a meaningful reform of bankruptcy law. During the interviews in this study, the entrepreneurs reflected on the early days of their business venture, the moment of first detecting the prospect of business failure, their personal experiences during business failure, and the aftermath of bankruptcy and debt rescheduling. The findings indicate that a bankruptcy experience can be compared to losing a loved one: a psychological process similar to mourning. The findings show that a lack of empathy, respect and transparency by formal institutional representatives such as judges, trustees and administrators is seen by the entrepreneurs as ‘emotional punishment’, and can be considered as a major source of their grief. Because of this grief, the bankruptcy and debt rescheduling experience can be extremely stressful causing severe psychological and physical distress. Implications for theory and practice are discussed.
Highlights
In a study of 137 bankruptcies, Couwenberg and De Jong present evidence on the efficiency of the resolution of small and medium-sized firms in financial distress.[1]
The bankruptcy experiences of entrepreneurs illustrate that business failure is a phenomenon with profound personal and social consequences
Entrepreneurs who are in a debt rescheduling scheme after being declared bankrupt generally cannot personally let go of their demised business
Summary
In a study of 137 bankruptcies, Couwenberg and De Jong present evidence on the efficiency of the resolution of small and medium-sized firms in financial distress.[1] In the Dutch liquidation-based bankruptcy system, they found that, on average, total payouts to all creditors are 37 per cent of the total debt outstanding before bankruptcy. Other studies of defaulting firms in a liquidation procedure show similar results.[2] empirical work on the efficiency of reorganisation procedures report higher recovery rates, ranging from 43 per cent. The prediction of business failure has, received wide research attention, for example in finance and accounting.[5] As Aziz and Humayon argue, ‘the early detection of financial distress and the use of corrective measures (such as changes in corporate governance) are preferable to protection under bankruptcy law’.6. As Aziz and Humayon argue, ‘the early detection of financial distress and the use of corrective measures (such as changes in corporate governance) are preferable to protection under bankruptcy law’.6 a parallel stream of business research can be observed focusing on corrective measures and prevention, such as studies on early warning signals, turnaround management, or other forms of informal reorganisation.[7]
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