The Low Usage of Bankruptcy Procedures: A Cultural Problem? Lessons From Spain
Ibero-American Institute for Law and Finance, Working Paper Series 5/2016
29 Pages Posted: 26 May 2016 Last revised: 26 Aug 2019
Date Written: June 17, 2016
While filing for bankruptcy does not seem appealing for any debtor or creditor regardless of the jurisdiction, the reluctance to use the bankruptcy system varies across countries. This article explores the underlying reasons and economic effects of the low usage of bankruptcy procedures in Spain, where the rate of business bankruptcies is one of the lowest in the world. Some authors have argued that the low usage of bankruptcy procedures in Spain is due to a ‘cultural’ problem faced by Spanish entrepreneurs. According to this hypothesis, the lack of a ‘bankruptcy culture’ makes Spanish entrepreneurs to be afraid of the use of the bankruptcy system. In this paper, however, I advocate for a totally different hypothesis. In my opinion, the low rate of business bankruptcies in Spain is not due to a ‘cultural’ problem but to an institutional one. Namely, I argue that the low rate of business bankruptcies is better explained by the unattractive insolvency regime for debtors and creditors traditionally existing in Spain, as well as other legal and institutional factors including a creditor-friendly corporate law, an efficient mortgage system, a rigid labor law, and a poor law of secured transactions. All these factors encourage both debtors and creditors to avoid the use of insolvency proceedings either by minimizing the risk of insolvency or by postponing -if possible, even avoiding- the bankruptcy system once a debtor becomes insolvent. By exploring the underlying reasons for the low use of the bankruptcy system in Spain, this paper seeks to contribute to the general understanding of the low rate of business bankruptcies around the world while assessing the economic effects potentially associated with this low usage of bankruptcy procedures. The paper concludes with several recommendations to make the Spanish bankruptcy system more appealing to both debtors and creditors.
Keywords: Bankruptcy procedure, bankruptcy rate, capital structure, non-specific asset, innovation, competitiveness, secured lenders, bank finance, stigma, diversification, discharge, entrepreneurship, economic growth
JEL Classification: K22
Suggested Citation: Suggested Citation