The Political Economy of the Bankruptcy Reform Act of 1978
96 Michigan Law Review (1997).
Posted: 6 Jun 1997
This article examines the legislative history of the Bankruptcy Reform Act of 1978, the source of modern bankruptcy law. The conventional academic view of the 1978 Act is that it serves the public interest in an orderly mechanism for resolving disputes between creditors and defaulting debtors. Against this view, this article argues that the 1978 Act reflects the interests of organized lobbyists, such as banks and other large creditors, lawyers, bankruptcy judges, and Article III judges, and the institutional interests of members of Congress, and that the 1978 Act does not reflect the influence of unorganized individuals, such as debtors. The article makes three main arguments. (1) The administrative structure introduced by the 1978 Act -- characterized by a strict division of labor between judges and trustees, elevation of the status of bankruptcy judges, and the creation of a federal agency to control trustees -- resulted from an effort by Congress to seize patronage opportunities from local governments and from the judicial branch of the federal government and to increase the value of these opportunities. (2) The exemption rules in the 1978 Act resulted from an effort by Congress to seize control over exemption policy from the states -- an effort, however, that the states resisted with partial success. (3) The law of reorganization resulted from the successful lobbying of large creditors and bankruptcy lawyers to increase their control over reorganization proceedings enough to enable them to freeze out small creditors and non-management equityholders. It is further argued that interest group pressures of the sort described above account for many of the provisions of the Bankruptcy Code that are the source of current dissatisfaction.
JEL Classification: G33, G34, G38, K22
Suggested Citation: Suggested Citation