Bankruptcy

Are U.S. Corporate Bankruptcy Laws a Model to the World?

By Peter Orville, Attorney at Law

According to a recent article in the The Economist, ?in one respect at least America remains a beacon for the rest of the world: its treatment of corporate bankruptcy.?   The purpose behind America?s corporate bankruptcy laws is ?to put economic resources back to productive use as quickly as possible.? U.S. bankruptcy laws distinguish between those companies that are potentially viable and those that are not. Chapter 11 bankruptcy is available for potentially viable companies, which allows them to restructure under court supervision. For those companies that The Economist defines as the ?terminally ill? Chapter 7 bankruptcy is available, which focuses on liquidating their assets and distributing them among creditors. Another positive aspect of U.S. bankruptcy is that it is a relatively quick process. And, the most crucial aspect of U.S. bankruptcy is that ?America?s leniency towards bankrupts encourages novices to start their own businesses and allows people who have failed to start again.?

As the world economy spirals downward, ?many governments are trying to shakeup their lethargic legal systems in order to speed up bankruptcy proceedings and … save viable businesses from premature liquidation.?  The Economist reports that in rich countries bankruptcy proceedings take two years on average, whereas in poorer nations they average four-and-a-half years.

As governments attempt to reform their bankruptcy laws, they should recognize the goals underlying the U.S. corporate bankruptcy system. ?In the short term enlightened bankruptcy laws reduce unemployment by keeping viable companies alive. In the longer term they boost rates of entrepreneurship.?

Full post as published by Bankruptcy Law Network on January 22, 2010 (boomark / email).