The Challenges of Bankruptcy Reform

The 2008 financial crisis was followed by a global economic downturn, a credit crunch, and a reduction in cross-border lending, trade finance, and foreign direct investment, which adversely affected businesses around the world. The consequent increase in the number of firm insolvencies in the corporate sector highlights the need for commercial bankruptcy laws to liquidate efficiently unviable firms and reorganize viable ones, so as to maximize the total value of proceeds received by creditors, shareholders, employees, and other stakeholders. The authors summarize the theoretical and empirical literature on bankruptcy design, discuss the challenges of introducing and implementing bankruptcy reforms, and present examples of how policymakers are trying to take advantage of the current economic downturn as an opportunity to engage in meaningful reform of the bankruptcy process. They also review the main principles of efficient insolvency laws and bankruptcy procedures.