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Abstract:
Current economic analyses of bankruptcy law emphasize the ex ante incentives created by bankruptcy rules. Commentators argue that consumer friendly changes to the Bankruptcy Code, implemented in 1978, explain the increase in non-business filings over the last twenty-five years. These reforms, they argue, created incentives for rational borrowers to opportunistically leverage up and then file for bankruptcy. These commentators advocate limiting the availability of the bankruptcy discharge, limiting exemptions, and loosening federal restrictions on reaffirmation agreements. These ideas form the basis for recently enacted bankruptcy legislation.

This article examines empirical data on the market for consumer credit and studies of consumer behavior, including studies of consumers who have filed for bankruptcy. Rather than corroborate rational actor and strategic incentive models of the market for consumer finance, the data lead to puzzling questions: During the twenty-five year period since the Bankruptcy Code was amended, the market for consumer credit has grown exponentially. Fear of strategic borrowers has not prevented the consumer credit market from expanding substantially, even into the subprime market, where the risk of strategic behavior is the greatest. Consistently wide spreads between banks' cost of borrowing and the rates charged by banks for consumer credit have made consumer finance transactions quite profitable for lenders, particularly where the borrowers' creditworthiness is questionable. In our view, these profits and changes in the technical infrastructure and legal regime in which consumer finance is imbedded help explain lenders' increasing willingness to lend to consumers, even in the face of increases in both the default and the non-business bankruptcy filing rates.

What then explains consumers' increasing willingness to demand consumer credit? Although lenders' cost of funds has diminished substantially in the past twenty-five years, until recently little of this decrease has translated into reduced credit costs for consumer borrowers. Moreover, statistics show that U.S. households substantially increased their debt obligations during this period despite a failure of income or wealth to grow at corresponding rates. Increased willingness to lend, without a corresponding reduction in interest rates, should not significantly influence rational borrowers' preference for debt. Why are consumers willing to pay such high rates? The answer proffered by incentive analysts is that consumer borrowers are strategic, and hence don't care about higher rates or spreads.

Behavioral decision research offers a counterstory that may better explain the behavior of both borrowers and lenders. This article outlines some of the implications that behavioral decision research holds for existing models of consumer borrowing and post-default behavior. Cognitive experiments suggest that, in order to compensate for bounded rationality, consumers adopt decisionmaking heuristics that both assist individuals in making purchasing and borrowing decisions and introduce systematic biases into consumers' decisionmaking. These biases lead consumers to buy and borrow more than a rational credit-using purchaser would. Overleverage results more from biases in consumer borrowers' decisionmaking than from efforts to realize on strategic advantages imbedded in consumer finance and consumer bankruptcy laws. Moreover, rational lenders can profit from these biases, even in the face of higher default rates. The increased risk is simply built into the lender's business model.

The policy implications of behavioral decision research are, thus, considerable. On this view, limiting access to the bankruptcy discharge will do little to reduce consumer leverage and little to reduce the level of consumer default (even if those defaulting consumers find themselves unable to file for bankruptcy). It will simply increase the profit earned by consumer lenders and the harm suffered by consumers.

bankruptcy, credit, consumers, borrowers, rational behavior

Abstract:
To meet the challenges of the 21st Century, UNCITRAL (the United Nations Commission on International Trade Law) has done more than simply reform trade law; it has also reconceived its mission and the means by which it carried out its central purposes. Although the UN resolution creating UNCITRAL initially spoke in terms of the progressive harmonization and unification of the law of international trade, UNCITRAL now defines its mission as the modernization and harmonization of trade law. UNCITRAL's adoption of modernization as a goal both expands its organizational reach and demands technologies that will underwrite its expansive aspirations. As UNCITRAL has shifted its focus toward modernization, it has invented new legal technologies - guides to enactment, recommendations, model legal provisions, and legislative guides - that offer greater flexibility to reform a broader range of laws, especially with the benefit of time and incremental progress. One such technology, UNCITRAL's Legislative Guide on Insolvency Law, combines a range of legislative recommendations with explanatory commentary. The array of linguistic forms in which the recommendations were expressed in the Guide, and the combination of commentary with recommendations, gave UNCITRAL the flexibility to adjust its level of prescription to the level of consensus it could achieve and, as a result, the flexibility to modernize insolvency law. UNCITRAL's efforts to modernize the law of international trade are not inconsistent with its mandate to pursue the harmonization and unification of trade law. A legislative guide offers national actors a wider range of choices, albeit within limits. As a result, the decision to promulgate a legislative guide might in practice result in greater harmonization on the ground than a model law or convention.

Abstract:
In late 2004, the United Nations Commission on International Trade Law (UNCITRAL) concluded a five-year project to produce global standards on corporate bankruptcy law for national law-makers. Because insolvency law is so culturally contextualized, skeptics viewed any global consensus as either impossible to achieve or likely to result in language so vague as to be useless. Yet in a surprisingly short time, UNCITRAL produced its Legislative Guide on Insolvency Law. Even before completion of the Guide, international organizations, as well as reformers from advanced and developing economies, began using its provisions for standard-setting and national law reform. UNCITRAL's Legislative Guide presents more than a simple success story; adoption of the Legislative Guide on Insolvency Law presents a vantage point for generating a theory of conditions under which global organizations can resolve a central paradox of global lawmaking. The paradox is straightforward: international organizations must be legitimate to be effective; but effectiveness is subverted by the very process of legitimation. If law-making organizations are not considered legitimate, the principles or rules articulated by them will be less persuasive and hence less binding. In turn, a lower probability of compliance or adoption by nation-states will reduce global convergence around the norms. But to become legitimate through representation, international organizations must incorporate divergent interests, which at best complicate and at worst thwart consensual lawmaking. It is therefore both a scholarly challenge and a pragmatic necessity to understand what resolutions of this tension are possible in global lawmaking forums.

Abstract:
The benefits of incrementalism are frequently lauded in international lawmaking. Scholars argue that these benefits accrue to international organizations with limited resources or to nation-states that are reluctant to move too fast. Using the case of UNCITRAL's (the United Nations Commission on International Trade Law) global lawmaking over the last forty years, we develop the concept of incrementalism in two ways. First, we show that incrementalism takes at least three forms: vertical incrementalism occurs when international organizations dig more deeply in a particular area over progressive rounds; horizontal incrementalism can be observed when international organizations successively expand the substantive boundaries of the range of topics they seek to embrace; pyramidal incrementalism occurs when an international organization deliberately drafts its norms by standing on the shoulders of prior efforts of other international organizations. Second, international organizations use these several incrementalisms to build both general institutional legitimacy and authority in a particular area of global lawmaking. Following the theory of legitimacy in international organizations, we find that incrementalism facilitates legitimacy because it assists an international organization in promoting a perception of its effectiveness to the international community and sovereign states. Over time, a succession of incremental improvements sets up expectations that its success will occur as a matter of course. By using incrementalism to build legitimacy, simultaneously international organizations strengthen their own authority, build expectations of success in the production of global norms, and increase the probability that global norms will be adopted. Insolvency law highlights the relationships between incrementalism and legitimacy because international agreement on the substance of insolvency law was perceived by many to present insoluble difficulties. A special focus on UNCITRAL's Working Group on Insolvency Law, the Commission's Model Law on Cross-Border Insolvency, and its Legislative Guide on Insolvency Law, demonstrates the interplay of incrementalisms and raises further questions about their implications for legitimacy.

Abstract:
This article critiques two of the 2005 amendments to the Bankruptcy Code - one related to pre-bankruptcy counseling and the other related to post-filing debtor education. The article questions whether, when one looks beneath the surface, these new mandates actually improve the lives of consumer debtors. There are plenty of statutory requirements accompanying these new initiatives but these particularized requirements do not address the most critical issues, including establishing the goals of the counseling and education and the content of the required programming. In addition, we fear that the mandates will simply be an added cost of entering and exiting the bankruptcy system without providing concomitant benefits. That would mean we have created an empty mandate. We also provide suggestions for improvement that are feasible and do not require statutory amendment yet again.

bankruptcy, financial education, credit counseling, money management, legislative change and predatory practices

Abstract:
Within a generation, household overindebtedness has grown to become a social problem of significant proportion in the US, the UK, and around the world. Public policy makers on both sides of the Atlantic have taken initial steps to ameliorate excessive and unwise use of consumer credit, by reforming the procedures for settling and collecting defaulted consumer debt (including the procedures available under consumer bankruptcy law) and by providing enhanced disclosure and other protections to borrowers. We focus on credit card disclosure reforms in this paper and note that empirical research (ours and others) suggest that enhanced disclosure requirements are, at best, an incomplete mechanism for tackling the problem of overindebtedness. Enhanced disclosure presumes a rational actor model of consumer decisionmaking. In earlier articles, both together and with other co-authors, we have argued that extant data do not support fundamental assumptions underlying a strong version of the rational actor model of consumer credit but do support models that view consumer borrowers as quasi-rational, emotional actors. Research supporting a behavioral, emotional model of consumer decisionmaking undercuts enhanced disclosure as a remedy for increased consumer debt loads. This article proceeds in four parts: Part I compares household indebtedness - and measures of overindebtedness - in the US and UK. Part II looks at recent legislative responses to this problem, and concludes that the US approach is premised on a rational actor model of consumer decisionmaking, while the UK presumes a consumer in need of regulatory protection, enhanced information and debt advice. In Part III, we describe our most recent experimental work and its results, and reach similar conclusions about the likelihood that enhanced disclosure will quell the problem of overindebtedness. Part IV draws tentative conclusions for future research intended to study overindebtedness.

Abstract:
After outlining the collective action issues that the unsecured creditors face in bankruptcy and the conventional notion that creditors' committees or creditors' representatives assist in resolving these obstacles, we compare the recommendations of the UNCITRAL's Legislative Guide on Insolvency Law to the laws on the representation of unsecured creditors in bankruptcy proceedings in eight countries: United States, United Kingdom, France, Germany, Russia, South Korea, Singapore and China..

Our findings reveal the presence of insolvency laws governing creditor representation in all the reviewed jurisdictions, whether or not the debtor remains in possession. The jurisdictions vary in the structure of the representative bodies, in the criteria for eligibility for a committee, and in the powers given to the committees. Further research will be necessary to ascertain whether these differences affect the dynamics of bankruptcy proceedings, especially reorganization proceedings. Nonetheless, our research clearly shows that there is a widespread acceptance of the notion that unsecured creditors need a specific structure for the representation of their interests and that the structures selected by different legislators tend to share certain characteristics.

Abstract:
Our comparative case studies of bankruptcy lawmaking reveal an apparent political universal. In neither advanced (U.S., Britain) nor developing countries (China, Indonesia, Korea) do debtors consistently play a major role in corporate bankruptcy reforms. This is a puzzle. Debtors (managers/owners) are the subjects of bankruptcy law. It is their corporations that are liquidated or reorganized. It is upon their discretion that much decision-making relies in corporate restructuring. Yet, with few exceptions, they are little consulted or show little interest in contributing to reforms. How is this to be explained? Moreover, a similar pattern can be observed UNCITRAL's global norm-making for corporate bankruptcy regimes. Debtors are even more remote from the creation of model laws, legislative guides, and insolvency principles. Yet the central tendency of global norms has been to strengthen the rehabilitative ideal in corporate reorganization. Based on our research on global normmaking and national lawmaking in Britain, the U.S., China, Indonesia and Korea, the paper considers six hypotheses: (1) Debtors do not recognize their own interests; (2) Debtors are unable to mobilize; (3) Debtors shy away from the odium of corporate failure; (4) Debtors are blocked by other stakeholders from exercising influence; (5) The most powerful debtors can solve their financial problems outside bankruptcy law; (6) Debtors' interests are articulated by other influential stakeholders.

Abstract:
The market for home loans has changed dramatically over the past thirty years, due, in large part, to the development of a market for asset-backed securities. Encouraged through the creation of Fannie Mae and Freddie Mac - government-sponsored entities created to purchase and package small-to-medium-sized “conforming” mortgages - that effort had appeared until recently to be a success. A robust market for real estate mortgage-backed securities (“RMBS”) developed and then expanded well beyond the market for “prime” “conforming” mortgages that could be handled by Fannie and Freddie. The development of a secondary market for both conforming and nonconforming home loans increased the availability of mortgage credit to consumers with lower income levels and with worse credit histories than ever before. But, as recent events have demonstrated, this increased liquidity came at a high price.

In this article, we identify market failures both on the supply side and the demand side of the home mortgage market. On the supply side, the problem lies in imperfect incentive structures for the various supply-side gatekeepers. On the demand side, our concerns lie principally in the cognitive biases of consumer borrowers and the absence of demand-side institutions to either constrain or debias consumer choice. We then explain why shifts in the nature of mortgage finance led to a greater need for consumer protection. We examine various demand-side gatekeeping institutions, exploring their interrelationships, as well as their relative strengths and weaknesses. As noted above, supply-side gatekeepers face, as of yet, unchecked incentives to maximize the amount of lending without also looking to minimize consumers’ risk of default. Gatekeepers on the demand side generally do not face the same conflicts. However, we identify a different set of institutional impediments and conclude that none of the existing institutions are well equipped to debias consumers’ decision-making processes. Finally, we conclude by emphasizing the need to explore the contours of institutional structure and regulatory options. While it suggests a framework for evaluating legislative reforms, we leave the development of this topic for future research.

Abstract:
This paper focuses on a largely neglected aspect of legitimation in international organizations (IOs)-the rhetorical work done by IO scripts as a legitimation strategy of IOs. Based on extensive research within regional and global IOs, we demonstrate four aspects of rhetorical legitimation. First, IO texts draw upon a finite repertoire of rhetorical devices (a) to propagate legitimation strengths of an IO, (b) to amplify or compensate for legitimation weaknesses and (c) to express rhetorical repertoires which convey their own intrinsic merits. Second, configurations of rhetorical devices in IO texts are affected by temporal contexts, such as exogenous shocks and the historical sequencing of IO norm production. Third, the negotiation of relations of IO interdependency, including competition and cooperation, are partly signaled and managed through the rhetorical repertoires of IO products. Fourth, texts have their own properties, formal and substantive, that are crafted to persuade domestic law-makers.

economic development, financial crisis, financial markets, globalization, international economic order, norms, K law and economics, international trade law, O19 role of international organizations, Z1 economic sociology

Abstract:
Neo-libertarian scholars prefer contract bankruptcy to corporate reorganization under chapter 11 of the Bankruptcy Code. These free market theorists contend that business bankruptcy legislation imposes net social costs - costs which voluntary contractual arrangements would avoid. Through application of a comparative institutional framework, the Article seeks to refute neo-libertarian theorists' claims that private action is preferable to business bankruptcy legislation. It finds the case for favoring contractual over legislative bankruptcy rules to be incoherent in at least three ways. First, neo-libertarian bankruptcy theorists' claim that appropriate ex ante incentives for corporate actors are best realized through private agreements confuses substance with form. A firm's incentives are more likely to be affected by the content of the bankruptcy rule than whether it is structured as legislative or contractual. Second, theorists' emphasis on the importance of individual autonomy is empty rhetoric. Many of the contractual bankruptcy resolutions offered by neo-libertarian theorists would covertly bind non-parties, a result completely contrary to principles of freedom of contract. Finally, despite assertions to the contrary, many of the proposed private-law bankruptcy substitutes would create immense decisionmaking costs, and all of the contract bankruptcy proposals would impose enforcement costs of a magnitude both substantial and comparable to the legislative rules these contracts are meant to replace. Accordingly, there is no basis for concluding that contract rules are always less expensive to implement and enforce than legislative ones.

Abstract:
In this Article, I characterize the Bankruptcy Code as a fragile collection of statutory liability rules that are intended to resolve the common pool problems faced by the creditors of a financially distressed debtor. I argue that creditors' self-interested races to amend these bankruptcy laws have not resulted in welfare-maximizing legislation, much in the same way that rational creditors' races to levy against the assets of a financially distress debtor do not maximize creditors' collective interests.Part I briefly reviews bankruptcy scholarship on the politics of bankruptcy law. It concludes that, although bankruptcy theorists have considered the necessity for bankruptcy law and its normative underpinnings, they have not addressed the process by which Congress enacts these laws. Part II draws on game theory to define the circumstances under which a common pool problem occurs and is solved, either through self-help or the enactment of statutory rules of liability. Part III next critically and comparatively describes economic and political theories of legislation. Part IV then combines game theory with public choice and interest group theories in a model of legislative resolutions to common pool problems. It identifies the weaknesses inherent when rules of liability are enacted to resolve common pool problems, generally, and financial common pool problems, specifically, and distinguishes the pressure for their enactment or repeal from the pressure for their revision.