Bankruptcy's Rarity: An Essay on Small Business Bankruptcy in the United States

22 Pages Posted: 26 Jun 2008 Last revised: 15 Nov 2013

Date Written: June 1, 2008

Abstract

Most nations have enacted statutes governing business liquidation and reorganization. These statutes are the primary focus when policymakers and scholars discuss ways to improve laws governing business failure. This focus is misplaced, at least for distressed small businesses in the United States.

Evidence from a major credit bureau shows that over eighty percent of these businesses liquidate or reorganize without invoking the formal Bankruptcy Code.

The businesses instead invoke procedures derived from the laws of contracts, secured lending, and trusts. These procedures can be cheaper and speedier than a formal bankruptcy filing, but they typically require unanimous consent of senior, secured lenders. This essay identifies the conditions under which a business owner is able to obtain lender consent. The empirical findings point to an important balance between a nation's formal insolvency statutes an alternative modes of liquidation an reorganization. This balance, the essay argues, should play a central role in any discussion of insolvency-law reform.

Suggested Citation

Morrison, Edward R., Bankruptcy's Rarity: An Essay on Small Business Bankruptcy in the United States (June 1, 2008). European Company and Financial Law Review, Vol. 5, No. 2, June 2008, Available at SSRN: https://ssrn.com/abstract=1151746

Edward R. Morrison (Contact Author)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

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