Working Paper No. 02-22:
The Past, Present, and Future of Bankruptcy Law in America

Author(s):

Todd Zywicki

Date Posted: 2002

Availability:
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Abstract:

This essay reviews David A. Skeel, Jr., Debt's Dominion: A History of Bankruptcy Law in America. Although nominally a book about the history of bankruptcy law in America, Skeel's book is a comprehensive analysis of the past, present, and future of bankruptcy law in America. Skeel divides the history of bankruptcy law in America into three historical stages: the Nineteenth Century, the era of the 1898 Bankruptcy Act and the Great Depression, and the modern era of the 1978 Bankruptcy Code. As Skeel notes, the shape of bankruptcy law and practice throughout American history is at least as much a factor of political considerations and influence as economic considerations. To develop his point, Skeel draws on the fields of public choice and social choice, both of which apply the assumptions and tools of economics to the study of political science. Skeel uses these tools to shape his narrative, giving his argument an analytical edge that prior historical studies of American bankruptcy law have lacked. In particular, American bankruptcy law can be understood as resulting from the clash of three sets of interests: pro-debtor ideological interests (often spearheaded by law professors), creditors, and bankruptcy professionals (including bankruptcy judges). Although the outcome of this three-way struggle is unclear at any given moment, the dominant course of evolution of American bankruptcy law has been towards increasingly-generous bankruptcy laws that provide strong incentives for both individual and corporate debtors to file bankruptcy.

Building on Skeel's insights, I then offer my own impressions of the current debate over the bankruptcy reform act as well as the future of bankruptcy law in America. Although largely explained by the factors identified by Skeel, the current debate over the bankruptcy reform act has introduced a new element to the traditional debate - an ideology of personal responsibility ushered in by the Republican takeover of Congress in 1994 that has offset the traditional dominance of prodebtor ideology. At the same time, the bankruptcy system has become sufficiently unbalanced in a prodebtor direction that creditors have been able to overcome the collective action problems that have undermined prior reform efforts. These historical developments have made bankruptcy reform possible, unlike reform efforts in the past. With respect to the future of bankruptcy law, this essay argues that the likely result will be global convergence on efficient bankruptcy laws. Building on prior work demonstrating convergence on efficient corporate law rules in the American federal system, this essay argues that globalization will drive a similar convergence on efficient bankruptcy laws. This will encourage countries with excessively prodebtor laws, such as the United States, to adopt less-generous laws; it should also induce European countries to loosen their laws so as to encourage greater entrepreneurship and risk-taking.