Different Approaches to Bankruptcy

In the last fifteen years or so, lawyers working in law and economics and economists with an interest in legal matters have turned their attention to the topic of bankruptcy. A large amount of work has resulted, both theoretical and empirical, some of which has been concerned with the functioning of existing bankruptcy procedures and some with bankruptcy reform. Although researchers in this area have expressed different views, I believe that one can identify a consensus on certain issues, e.g., the goals of bankruptcy and some of the characteristics of an efficient bankruptcy procedure. This paper summarizes this consensus. One point I will stress is that it is unlikely that one size fits all.' That is, although some bankruptcy procedures can probably be rejected as being manifestly bad, there is a class of procedures that satisfy the main criteria of efficiency. Which procedure a country chooses or should choose may then depend on other factors, e.g., the country's institutional structure and legal tradition. One can also imagine a country choosing a menu of procedures and allowing firms to select among them.