America has one of the most progressive bankruptcy codes in the world, but it’s one of the biggest kept secret amongst both business and ordinary citizens. However, academics from around the country haven’t overlooked how bankruptcy laws impacts entrepreneurship around the world. In a recent report published by Journal of Business Venturing, experts explore bankruptcy’s impact.
Let’s take a look at a few of their findings:
Archaic Bankruptcy Laws Kill Business Activity
Difficult times are inevitable in business, that’s why it’s important to have bankruptcy laws which allow a business debtor to either liquidate or restructure their debts. But what happens when a country enacts laws that require a debtor company remain liable for debts 30 years after their bankruptcy discharge? Would be entrepreneurs forgo business ownership, or companies that should liquidate simply avoid the bankruptcy process. In the end, such bankruptcy laws stifle innovation and commerce, and eventually the economy suffers.
Inexpensive Bankruptcy Is Important
Even in countries with relatively progressive bankruptcy systems, the cost of filing bankruptcy can not only discourage existing companies from filing, it can discourage new companies for beginning. In the United States, Chapter 11 bankruptcy can cost a firm about 7 percent of its assets; but in countries such as Poland and Thailand, the cost of bankruptcy is a whopping 22 percent and 36 percent. Not many companies can remain viable if they spend upwards of 36 percent of their assets on debt.
The Ability To Retain Control
It may surprise many business debtors, but the United States is one of the few developed countries which allow a debtor business to retain control of its finances in bankruptcy. In countries such as Great Britain and Germany, the company in bankruptcy is handed over to creditors leading to a large number of bankruptcy liquidations. The backend result is that few companies want to file bankruptcy knowing that they won’t be given a chance to revive the business if they face difficult times.