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.
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Paper provided by Institute for Policy Resarch at Northwestern University in its series IPR working papers with number
98-8.
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