Imminent Bankruptcy Reform: a British View

Debtors in the United States have enjoyed until a few months from now the most favorable liquidation and reorganization laws in the developed world. The Economist in its article Morally bankrupt? (4-15-2005) reported that 5 times as many persons filed bankruptcy last year than did in 1981 in the United States, which was when the current bankruptcy code was just 3 years old. England recently relaxed its bankruptcy laws in favor of debtors, and a whopping 36,000 filings resulted in one year, still per capita Americans file 9 times as often. Congress and its lobbyist benefactors from the credit industry overwhelmingly blame relatively pain free bankruptcy filing processes for the tidal wave of bankruptcies. But other scholars have a point that at the same time Congress initially passed debtor friendly bankruptcy laws in 1978, the Supreme Court at nearly the same time held that federal credit law pre-empted most state level usury laws which had reined in the credit industry with regulated interest rates. SeeMARQUETTE NAT. BANK v. FIRST OF OMAHA CORP., 439 U.S. 299 (1978) {National Banking laws pre-empt state level usury laws'application to credit cards.} Another wrinkle only a publication devoted to free markets would have noticed about the new bankruptcy regime: the stricter laws, even though they will collar many profligate debtors will likely also stifle entrepreneurship. Economic studies report that significantly more individuals are self employed in states that have more debtor generous exemption laws (Life after debt Economist 4-15; See PERSONAL BANKRUPTCY AND THE LEVEL OF ENTREPRENEURIAL ACTIVITY Journal of Law and Economics, Fan & White, October 2003 abstract). On the other hand other studies indicate credit will be more available if laws tend to favor creditors See RAND JOURNAL OF ECONOMICS, Bankruptcy and Small Firms' Access to Credit Spring 2004 Berkowitz and Michelle J. White. Credit cards are often the lenders of last resort for budding entreprenuers who because of inexperience or bad experience are unable to obtain conventional bank financing for a new venture. Credit cards do play up on this with many advertisements for business only credit cards. Even Visa got into the Act, because in almost every episode of the Apprentice the contestants receive Visa credit cards fortheir seed money

Ironically economically stagnant Europe has looked at making debt reorganization more not less cumbersome and painful to failed businesses principals, at the same time we are headed in the other direction. When even nine out of ten well planned businesses fail, you can’t count on tighter credit always finding the deserving entrepreneur.