Bankruptcy and small business - lessons from the US and recent reforms

Konkurs, Klein- und Mittelunternehmen, Insolvenzrecht, Rechtsreform, Vereinigte Staaten, Bankruptcy, Small and medium-sized enterprises, Bankruptcy law, Legal reform, United States

Research, Analysis and Insight into National Standards (RAINS) Project Final Report: National Standards and the Damage Done

This is the final report of the Research Analysis and Insight into National Standards (RAINS) project, a three-year study of the enactment of the National Standards policy in six diverse primary and intermediate schools. This report provides an overview discussion of the pros and cons of the National Standards policy as experienced by staff, children and parents in the RAINS schools. It summarises the policy and methodological background to the research and the findings of the two previous RAINS reports. The report is also being accompanied by online case studies and other data files

Explaining the Flood of Asbestos Litigation: Consolidation, Bifurcation, and Bouquet Trials

The number of asbestos personal injury claims filed each year is in the hundreds of thousands and has been increasing rather than decreasing over time, even though asbestos stopped being used in the early 1970's. Eighty firms have filed for bankruptcy due to asbestos liabilities including 30 filings since the beginning of 2000. This paper examines why asbestos claims are increasing over time. Because large numbers of asbestos claims are filed in particular courts, judges in these courts have adopted procedural innovations intended to clear their dockets by encouraging mass settlements. These innovations cause trial outcomes to change in plaintiffs' favor. As a result, the innovations make the asbestos crisis worse by giving plaintiffs' lawyers an incentive to file large numbers of additional claims in the same courts. The paper uses a new dataset of asbestos trials to test the hypothesis that three important procedural innovations--consolidated trials, bifurcation, and bouquet trials--favor plaintiffs and therefore encourage the filing of additional claims. I find that bifurcation and bouquet trials nearly triple plaintiffs' expected return from trial, while consolidations of up to seven lawsuits raise plaintiffs' expected return from trial by one- third to one-half.

Sovereigns in Distress: Do They Need Bankruptcy?

macroeconomics, sovereign debt, new bankruptcy arrangements, Sovereigns, Distress, Bankruptcy

Bankruptcy and Small Firms' Access to Credit

In this paper, we investigate how personal bankruptcy law affects small firms' access to credit. When a firm is unincorporated, its debts are personal liabilities of the firm's owner, so that lending to the firm is legally equivalent to lending to its owner. If the firm fails, the owner has an incentive to file for personal bankruptcy, since the firm's debts will be discharged and the owner is only obliged to use assets above an exemption level to repay creditors. The higher the exemption level, the greater is the incentive to file for bankruptcy. We show that supply of credit falls and demand for credit rises when non-corporate firms are located in states with higher bankruptcy exemptions. We test the model and find that, if small firms are located in states with unlimited rather than low homestead exemptions, they are more likely to be denied credit, they receive smaller loans and interest rates are higher. Results for non-corporate versus corporate firms suggest that lenders often disregard small firms' organizational status in making loan decisions.

Personal Bankruptcy and the Level of Entrepreneurial Activity

The U.S. personal bankruptcy system functions as a bankruptcy system for small businesses as well as for consumers. When firms are non-corporate, debts of the firm are personal liabilities of the entrepreneur/owner. If the firm fails, the entrepreneur has an incentive to file for bankruptcy under Chapter 7, since both business debts and the entrepreneur's personal debts will be discharged. The entrepreneur must give up assets above a fixed bankruptcy exemption level for repayment to creditors, but future earnings are entirely exempt. Exemption levels are set by the states and they vary widely. We show that higher bankruptcy exemption levels benefit potential entrepreneurs by providing partial wealth insurance. The predicted relationship between the probability of owning a business and the exemption level is positive at low exemption levels, but may be either positive or negative at high exemption levels, depending on whether higher bankruptcy costs outweigh the gain from additional insurance. We test this prediction and find that the probability of families who are homeowners being self-employed is 35% higher if families live in states with unlimited exemptions rather than low exemptions. We also find evidence that families who are homeowners are more likely to start businesses and to organize their businesses as non-corporate rather than corporate if they live in states with high or unlimited, rather than low, bankruptcy exemptions.

Asbestos and the Future of Mass Torts

Asbestos was once referred to as a miracle mineral' for its ability to withstand heat and it was used in thousands of products. But exposure to asbestos causes cancer and other diseases. As of the beginning of 2001, 600,000 individuals had filed lawsuits for asbestos-related diseases against more than 6,000 defendants. 85 firms have filed for bankruptcy due to asbestos liabilities and several insurers have failed or are in financial distress. More than $54 billion has been spent on the litigation higher than any other mass tort. Estimates of the eventual cost of asbestos litigation range from$200 to $265 billion. The paper examines the history of asbestos regulation and asbestos liability and argues that it was liability rather than regulation that eventually caused producers to eliminate asbestos from most products by the late 1970s. But despite the disappearance of asbestos products from the marketplace, asbestos litigation continued to grow. Plaintiffs' lawyers used forum-shopping to select the most favorable state courts techniques for mass processing of claims, and substituted new defendants when old ones went bankrupt. Because representing asbestos victims was extremely profitable, lawyers had an incentive to seek out large numbers of additional plaintiffs, including many claimants who were not harmed by asbestos exposure. The paper contrasts asbestos litigation to other mass torts involving personal injury and concludes that asbestos was unique in a number of ways, so that future mass torts are unlikely to be as big. However new legal innovations developed for asbestos are likely to make future mass torts larger and more expensive. I explore two mechanisms-- bankruptcies and class action settlements--that the legal system has developed to resolve mass torts and show that neither has worked for asbestos litigation. The first, bankruptcy by individual asbestos defendants, exacerbates the litigation by spreading it to non-bankrupt defendants. The second, a class action settlement, is impractical for asbestos litigation because of the large number of defendants. As a result, Congressional legislation is needed and the paper discusses the compensation fund approach that Congress is currently considering.