Bankruptcy System Research Articles

Executive Benefits Insurance Agency V. Arkison: Does Party Consent Render Bankruptcy Court Adjudication Constitutionally Valid?

This paper is a report of the National Bankruptcy Conference. It analyzes one of the issues currently before the Supreme Court in the case of Executive Benefits Insurance Agency v. Arkison — the constitutional effectiveness of party consent to adjudication by a non-Article III judge. The paper examines how the Supreme Court’s precedents should guide the Court’s analysis of that issue and discusses the negative impact a decision rejecting consent could have on the operation of the bankruptcy system, adjudication of civil actions by magistrate judges, and the workload of the district courts. After reviewing past decisions in which the Court or individual justices suggested that party consent enables bankruptcy courts to decide matters that Article III would otherwise prevent them from adjudicating, this paper examines the Court’s leading precedent on the constitutional effect of consent to non-Article III adjudication — the 1986 decision in Commodity Futures Trading Commission v. Schor. The paper contends that the Court’s analysis in Schor supports the constitutionality of bankruptcy court adjudication of private rights with the parties’ consent, notwithstanding the decision of three federal circuits to the contrary. The paper concludes with a discussion of the practical importance of the Court’s decision of the consent issue in Arkison. It provides examples of the delays and added costs that would result from a bifurcation of bankruptcy adjudication between bankruptcy and non-bankruptcy courts. It also notes the likely effect of the decision on magistrate judges and discusses the impact that a decision rejecting consent to adjudication by bankruptcy and magistrates judges would have on the workload of district courts.

Firm Debt Renegotiation, Reorganization Filing and Bank Relationships

AbstractIn this paper, we investigate the determinants of the firm's decision between informal or formal debt restructuring using a sample of Taiwanese listed firms. Our main results are as follows. First, bank shareholders fare significantly better with successful debt renegotiation by borrower firms than with the filing of a reorganization petition. Second, the stock market differentiates between reorganizations filed for opportunistic purposes and those reflecting formal financial resolutions. Third, the initial choice between debt renegotiation and reorganization filing is closely associated with the firm's bank relationships. However, this varies according to the relative bargaining power of firms and their banks, with the likelihood of successful debt renegotiation increasing with the bargaining power of the distressed firm. This suggests that a debtor‐friendly bankruptcy system does not necessarily enhance the efficiency of the resolution of financial distress in a financial system where banks are the dominant providers of capital.

OLA after Single Point of Entry: Has Anything Changed?

This white paper, written for the Roosevelt Institute, looks at the Dodd-Frank Orderly Liquidation Authority, as currently conceived of by regulators. The existence of OLA is crucial to the idea that the Dodd-Frank Act has actually ended too big to Since financial institutions remain very big, it is up to OLA to provide a means for them to fail. The real question is whether OLA will work and, as OLA was originally presented, there were good reasons for doubt.The FDIC has figured out a clever way to avoid the problems with OLA. Under the new point of approach, only the holding company would be placed in OLA, and the FDIC would then continue to prop up the operating subsidiaries, wherever located. The new question is: Will single point of entry work?This short essay explores this question and what remains to be done to create a workable bankruptcy system for global banks. In short, I argue that while single point of entry is a great improvement, it still has its potential faults, and the excitement over it obscures many lingering questions. And nothing has been done to improve the ability of chapter 11 to handle a large financial institution, despite the fact that OLA is only supposed to backstop the normal bankruptcy process.

China as a Test Case: Is the Rule of Law Essential for Economic Growth?

China is the fastest growing country in the world. Yet its adherence to the Rule of Law is frequently criticized. Does the coexistence of these two facts mean that institutions in general, and the Rule of Law in particular, are not necessary for sustained economic growth? The experience of the Asian Tigers, who had an overall growth record in their early years at least equal to China's, suggests that China may face a slowdown in growth. China is still a poor country, poorer than the Asian Tigers when their growth slowdown began. The Asian Tigers faced many of the same problems of crony capitalism, connected lending and poor corporate governance that China now faces. China's institutional and governance weaknesses involve a weak judiciary, including a lack of judicial independence; a weak financial sector with inadequate banking and corporate bond markets; and an outmoded bankruptcy system. Yet China's leadership, starting with Deng Xiaoping, has avoided some of the missteps of the transition countries of the former Soviet Union and has recognized the need for an evolutionary approach toward a more efficient economic system. But there is nothing in China's experience to date that would lead to the conclusion that institutional and Rule of Law issues are not important in economic development.

Beyond bankruptcy: Does the US bankruptcy code provide a fresh start to entrepreneurs?

This paper assesses the extent to which the US bankruptcy system is effective in providing small businesses a “fresh start” after a bankruptcy filing. I use data from the 1993, 1998 and 2003 National Survey of Small Business Finances to explore how firms fare after a bankruptcy filing. On the positive side, previously bankrupt firms are not any more burdened than the average small firm by problems relating to profitability, cash flow, health insurance costs, or taxes. Further, the fact that these firms are surviving several years after the filing is itself a testament to the efficient functioning of the US bankruptcy system. It suggests that the bankruptcy system goes a long way toward helping businesses recover after a bankruptcy filing.However, the one area of concern that persists after a filing is financing or credit access. In general, these firms have a nearly 24 percentage point higher likelihood of being denied a loan and are charged interest rates that are more than 1 percentage point higher than those charged to other businesses. A bankruptcy affects all types of financing, even trade credit, which is a significant form of lending between businesses. In fact, it appears that firms with a bankruptcy record are rationed out of the market, with all types of loans being denied at significantly higher rates than other firms. Further, my results show that bankruptcy leads to a class of discouraged borrowers who are significantly less likely to even apply for a loan.

Credit Access and Credit Performance after Consumer Bankruptcy Filing: New Evidence

This paper uses a unique data set to shed new light on the credit availability and credit performance of consumer bankruptcy filers. In particular, our data allow us to distinguish between Chapter 7 and Chapter 13 bankruptcy filings, to observe changes in credit demand and supply explicitly, to differentiate existing and new credit accounts, and to observe the performance of each credit account directly. The paper has four main findings. First, despite speedy recovery in their risk scores after bankruptcy filing, most filers have much reduced access to credit in terms of credit limits, and the impact seems to be long lasting. Second, the reduction in credit access stems mainly from the supply side as consumer inquiries recover significantly after the filing, while credit limits remain low. Third, lenders do not treat Chapter 13 filers more favorably than Chapter 7 filers. In fact, Chapter 13 filers are much less likely to receive new credit cards than Chapter 7 filers even after controlling for borrower characteristics and local economic environment. Finally, we find that Chapter 13 filers perform more poorly than Chapter 7 filers (after the filing) on all credit products (credit card debt, auto loans, and first mortgages). Our results, in contrast to prior studies, thus suggest that the current bankruptcy system does not appear to provide much relief to bankruptcy filers.

No More Ping-Pong: The Need for Article III Status in Bankruptcy After Stern v. Marshall

No More Ping-Pong: The Need for Article III Status in Bankruptcy After Stern v. Marshall

An Analysis of the Bankruptcy Reorganization Procedure in China

This paper analyzes the reorganization procedure introduced into the Chinese bankruptcy system in 2007. It shows that managers devote more effort during the reorganization than before the bankruptcy when the emergence value of the bankrupt firm is substantial. In addition, in the pre-bankruptcy period, managers were shown to input less effort under the new law than under the old law. Finally, the paper demonstrates that the market interest rate under the new bankruptcy law is not necessarily lower than that under the old law. These results call attention to the potential costs of the reorganization procedure.

Insolvency Institutions and Efficiency: The Spanish Case

The paper warns about the potential efficiency losses associated with low business bankruptcy rates (number of firms filing for bankruptcy as a proportion of the total stock of firms) and shows that welfare could be improved by increasing the protection of creditors in the bankruptcy system. These ideas are illustrated with the Spanish case. The paper also predicts a positive correlation between welfare and bankruptcy rates, a finding that seems consistent with the empirical evidence. The argument, analysed with an incomplete contracts model a la Bolton and Scharfstein (1996), is as follows. The low efficiency and low creditor protection of the Spanish bankruptcy system relative to those of an alternative insolvency institution, namely the mortgage system, mean that firms and their creditors mainly deal with credit provision and eventual insolvency through the latter. However, in order to use the mortgage system, some firms must overinvest in capital assets (real estate, equipment) since those are the assets that can be pledged as mortgage collateral. This overinvestment leads to productive inefficiencies, which may be very costly for industries that require a high level of other factors of production (e.g. R&D). Furthermore, the mortgage system is too creditor friendly, in the sense that it always grants the control of the firm’s assets to creditors in the event of default. Since creditors are inherently biased towards liquidation, this leads to some inefficient liquidations.

Solving creditor problems in the twilight zone: Superfluous law and inadequate private solutions

Fiduciary duties are an integral part of the corporate law landscape. The law and economics analysis of these duties, especially the duty of directors to maximize shareholder wealth, shows that these duties fill contractual gaps, saving on transaction costs. Although duties to shareholders are well settled, duties to other participants such as creditors or employees are heavily debated. In this paper, we use an agency theory framework to address the relative efficiency of a duty to creditors, a duty to refrain from wrongful trading, or contractual devices. Such an analysis makes clear what effect these rules have upon the behavior of shareholders and boards and whether these rules can efficiently address agency problems. The upshot of the analysis is that both types of rules protect creditors, but the same can be said of specific contractual solutions. It is therefore unclear if the rules mitigate costs above and beyond what could be achieved by contract. Furthermore, the analysis shows that the type of bankruptcy system matters as well. Creditor protection is best delivered via a board friendly bankruptcy system instead of with a creditor friendly system that includes a wrongful trading rule. The conclusion is that creditor duties, or wrongful trading rules, are superfluous, while private solutions are still inadequate to solve all the agency problems in a way that the proponents of both types of creditor protections aim for.

Essential Corporate Bankruptcy Law

In this paper our goal is to identify the core of corporate bankruptcy law that parties cannot achieve on their own, no matter how robust their contract law. Our approach takes organizational law as starting point and we posit that bankruptcy law is a necessary addition to organizational law. Necessary in that two essential elements of corporate bankruptcy law cannot be achieved by contract: asset stabilization and asset separation. Asset stabilization refers to the ability to temporarily protect assets as a coherent whole. It includes obvious things like the stay on individual creditor collection, but also other features like the ability to provide post-bankruptcy liquidity to the debtor and delays on termination of contracts with the debtor.Asset separation captures the ability to separate assets from their concomitant liabilities. This might take the form of a discharge, but strictly speaking a discharge is not necessary to achieve asset separation.From both these elements a number of rules follow that are essential for any bankruptcy system, i.e. an encompassing collective process, a stay of creditors, a liquidity enhancing system of rules, a monitor and asset detachment rules. Other rules are non-essential, i.e. absolute priority rule, reorganization plan rules, debtor-in-possession rules, creditor committees, statutory priorities.Beyond the core of corporate bankruptcy law, features of the system are a matter of policy, and politics. Understanding where the core is, however, helps to focus policy makers’ attention on the choices involved in structuring an insolvency system. And it moves away from the notion that chapter 11 must be the standard against which all other laws are measured.

Why Do Spanish Firms Rarely Use the Bankruptcy System? The Role of the Mortgage Institution

Taking advantage of a rich database of more than 1 million companies in Spain, France and the U.K., we propose and test a hypothesis to explain why Spain has one of the world’s lowest business bankruptcy rates, even during the current economic crisis and after controlling for market exit rates. This hypothesis is based on two premises, the low efficiency of the Spanish bankruptcy system relative to that of an alternative insolvency institution, the mortgage system, and the unattractiveness of the personal bankruptcy law.

The Consumer Bankruptcy Fee Study: Final Report

The Consumer Fee Study’s primary objective is to identify and monetize these costs of bankruptcy access through the analysis of quantitative and qualitative data gathered from court dockets and from professionals working within the bankruptcy system. We began the quantitative section with the hypothesis that following BAPCPA’s enactment, the cost of accessing the consumer bankruptcy system increased. We set out to determine the degree of increased costs, as well as to identify the specific policies and practices affecting these costs. Additionally, we endeavored to evaluate, with specificity, how diverse local procedures and guidelines impact the system’s processes and outcomes. Our focus throughout the Study was on the consumer bankruptcy system and its principal stakeholders. Until now, empirical study of BAPCPA’s impact has focused primarily on the system’s demand side, gathering and analyzing financial and sociological data with respect to debtor households. The effect of BAPCPA on debtors, however, cannot be fully assessed without an examination of the architecture that surrounds a consumer’s decision to file, coupled with an account of the complexity of factors that inform and influence the consumer’s experience in the bankruptcy system. This Study addresses issues related to the institutional framework of consumer bankruptcy by not only measuring and monetizing the cost of access, but by also examining the incentives and constraints imposed by the system.

A Comparative Study on the Possibility of Implanting a Municipality Bankruptcy System - Implications of the Municipality Bankruptcy Act (Chapter 9 of the Bankruptcy Act) of the United States -

A Comparative Study on the Possibility of Implanting a Municipality Bankruptcy System - Implications of the Municipality Bankruptcy Act (Chapter 9 of the Bankruptcy Act) of the United States -

Race, Attorney Influence, and Bankruptcy Chapter Choice

We report on racially disparate uses of Chapter 13 bankruptcy. Currently, approximately 1,500,000 bankruptcy petitions are filed each year, with about 30 percent of those petitions being Chapter 13 cases. Although Chapter 13 can offer some legal advantages for persons seeking to protect valuable assets such as a house or automobile, it generally offers less relief and costs more than the primary alternative available to consumers, Chapter 7. The chief feature of a Chapter 13 bankruptcy case is a plan under which the debtor must devote all his or her disposable income to creditor repayment over a three‐ to five‐year period. Chapter 7, in contrast, requires only that the debtor turn over all nonexempt assets, with over 90 percent of Chapter 7 debtors having no assets to turn over. This article reports on two studies, one using data from actual bankruptcy cases and the other involving an experiment with a national random sample of bankruptcy attorneys. Because the court system does not collect racial data on bankruptcy filers, the first study uses data from the Consumer Bankruptcy Project. Even after controlling for financial, demographic, and legal factors that might favor a Chapter 13 filing, African Americans are much more likely to file Chapter 13, as compared to debtors of other races. The second study reports on an experimental vignette sent to a random sample of consumer bankruptcy attorneys who represented debtors. The attorneys were more likely to recommend Chapter 13 when the hypothetical debtors were a couple named “Reggie & Latisha,” who attended an African Methodist Episcopal Church, as compared to a couple named “Todd & Allison,” who attended a United Methodist Church. Also, attorneys viewed “Reggie & Latisha” as having better values and being more competent when they expressed a preference for Chapter 13 as compared to “Todd & Allison,” who were seen as having better values and being more competent when they wanted to file Chapter 7, giving them a “fresh start.” Previous research and the results from the present experimental vignette study suggest that consumer bankruptcy attorneys may be playing a very important, although likely unintentional, role in creating the racial disparity in chapter choice. Together, the two studies raise questions about the fairness of the bankruptcy system.

Leasehold Recharacterization in Bankruptcy: A Review and Critique

The recharacterization of leasehold interests as mortgages has several hundred years of history and doctrinal development that focuses on the intent of the parties. Bankruptcy cases, however, have recently abandoned this body of law, replacing it sub silentio with a federal economic substance test derived from an amalgam of tax and personalty recharacterization cases. This test is not only inconsistent with established state property law but, worse, is inherently arbitrary, unpredictable, and inconsistent. I advocate a return to a test based primarily on the expressed intent of the parties in order to respect the federalist structure of our property law and bankruptcy system, reduce forum shopping, and provide predictability for contracting parties as well as for third parties who rely on the recorded state of title.

The Brazilian bankruptcy law experience

In early 2005, the Brazilian Congress approved a new bankruptcy law. The new legislation increased creditor protection and improved the efficiency of the bankruptcy system. This paper evaluates the empirical consequences of a bankruptcy reform on a poorly developed credit market. Using data from Brazilian and non-Brazilian firms, we estimated, using two different models, the effect of the bankruptcy reform on contractual and non-contractual debt variables. In general, both models yielded similar results. Concerning contractual debt variables, we found a significant increase in the total amount and the long-term debt and a reduction in the cost of debt. For the non-contractual debt variable, we found no effect in the loans’ ownership structure.

Race, Attorney Influence, and Bankruptcy Chapter Choice

We report on racially disparate uses of chapter 13 bankruptcy. Currently, approximately 1,500,000 bankruptcy petitions are filed each year, with about 30% of those petitions being chapter 13 cases. Although chapter 13 can offer some legal advantages for persons seeking to protect valuable assets such as a house or automobile, it generally offers less relief and costs more than the primary alternative available to consumers, chapter 7. The chief feature of a chapter 13 bankruptcy case is a plan under which the debtor must devote all of his or her disposable income to creditor repayment over a 3- to 5-year period. Chapter 7, in contrast, requires only that the debtor turn over all nonexempt assets, with over 90% of chapter 7 debtors having no assets to turn over. This paper reports on two studies, one using data from actual bankruptcy cases and the other involving an experiment with a national random sample of bankruptcy attorneys. Because the court system does not collect racial data on bankruptcy filers, the first study uses data from the Consumer Bankruptcy Project. Even after controlling for financial, demographic, and legal factors that might favor a chapter 13 filing, African Americans are much more likely to file chapter 13, as compared to debtors of other races. The second study reports on an experimental vignette sent to a random sample of consumer bankruptcy attorneys who represented debtors. The attorneys were more likely to recommend chapter 13 when the hypothetical debtors were a couple named “Reggie & Latisha,” who attended an African Methodist Episcopal Church, as compared to a couple named “Todd & Allison,” who attended a United Methodist Church. Also, attorneys viewed “Reggie & Latisha” as having better values and being more competent when they expressed a preference for chapter 13 as compared to “Todd & Allison,” who were seen as having better values and being more competent when they wanted to file chapter 7, giving them a “fresh start.” Previous research and the results from the present experimental vignette study suggest consumer bankruptcy attorneys may be playing a very important, although likely unintentional, role in creating the racial disparity in chapter choice. Together, the two studies raise questions about the fairness of the bankruptcy system.

Preservation of Value, Conflict of Interests and Reputation in a ‘Contractualist’ Bankruptcy System

Preservation of Value, Conflict of Interests and Reputation in a ‘Contractualist’ Bankruptcy System

Undocumented Debtors

Undocumented immigrants in financial distress are barred from seeking many forms of assistance. Bankruptcy is one tool that is, in theory, available to undocumented debtors because legal status is not a prerequisite to bankruptcy relief. This Article explores undocumented debtors' interactions with the bankruptcy system. Undocumented debtors face both formal and informal barriers to bankruptcy filing, including fear of deportation, misinformation, and the legal requirement that the debtor produce financial records. It is both possible and desirable to ease many of these barriers. Bankruptcy relief facilitates the rehabilitation of debtors in financial distress, contributes to the economic well-being of the debtor's family and community, and provides an orderly, equitable resolution of the debtor's financial affairs. These values apply with no less force when the debtor is undocumented.