Bankruptcy Bounties

Abstract

Because theory suggests that businesses will wait too long to file voluntarily, current scholarship asks whether bankruptcy should offer larger rewards to managers and shareholders to induce them to file earlier. Although creditors could force firms into bankruptcy sooner by filing involuntary petitions, today involuntary petitions account for less than 0.05% of bankruptcy petitions. Even this meager number overstates involuntary bankruptcy’s role because most involuntary petitions are dismissed without a court even issuing an order for relief to formally begin a bankruptcy case. Involuntary petitions played a much larger role historically, accounting for more than ten percent of petitions during the first decades of the twentieth century. During this era, the total amount distributed to general creditors in all involuntary bankruptcies was double that distributed in all voluntary bankruptcies. Involuntary bankruptcies declined with the end of a practice that rewarded attorneys who filed involuntary petitions with lucrative post-petition work. We suggest that bankruptcy law should borrow from its past and reward creditors who file involuntary petitions.

Keywords: Bankruptcy

JEL Classification: G33,K00, K22, K35