Personal Liabilities and Bankruptcy
Reform:
An International Perspective
Michelle
Alexopoulos and Ian Domowitz
Abstract
Recent changes in bankruptcy law pertaining to personal
liabilities are widespread. Broad trends include eligibility of
personal liabilities in voluntary bankruptcy proceedings, strict
insolvency requirements, and debt discharge. Moral considerations
are even codified within the law, restricting discharge possibilities.
There is movement towards repayment of debt out of income, as opposed
to simple liquidation of assets. Associated with this trend are
pre-court negotiations and vagaries in the judicial process, with
respect to enforcement of objective criteria concerning the amount
of debt discharged in bankruptcy.
We document these changes across Europe and North America, and investigate
their theoretical implications with respect to policy initiatives
and intent. The focus is on interest rates, employment, and the
probability of bankruptcy. Employment rises as bankruptcy law becomes
more stringent. Employment effects are complex, however, leading
to the possibility that domestic and international interest rates
may rise as the law becomes stricter. It is not always clear that
a tightening of bankruptcy possibilities decreases the incidence
of bankruptcy, except in the stark case of no debt discharge. Flexibility
in the judicial process with respect to application of objective
standards for debt repayment is generally detrimental, suggesting
strict bankruptcy rules as opposed to court or pre-court discretion.
Firm ownership structures matter with respect to effects stemming
from bankruptcy law changes. Proposed international agreements,
such as the European Union Insolvency Convention, may lower international
interest rates, but do not necessarily imply a decrease in the incidence
of bankruptcy.
Michelle Alexopoulos, Department
of Economics, Northwestern University
Ian Domowitz, Currently, School of Business Administration,
Penn State University
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