Is Bankruptcy Law Bankrupt?
William H. MecklingUniversity of Rochester “Financial Markets, Default, and Bankruptcy: the Role of the State.” Law and Contemporary Problems 41 (Autumn 1977): 13–38. Economic analysis discloses that bankruptcy law adversely distorts the cost and allocation of credit. Bankruptcy (both corporate and non-corporate) is a legal device by which the state legally and economically intervenes to absolve insolvent debtors from their full financial obligations once the debtors have paid their debts to the limited extent that their assets allow. By releasing debtors from their contractual obligations, bankruptcy gives the illusion of benefitting debtors at the expense of creditors. But at best, this benefit is for the very short run. In practice, creditors take the risk of bankruptcy into account as a cost of extending credit. Borrowers will ultimately bear these costs either in the form of higher interest rates or by less available credit. Because the anticipated losses to creditors from bankrup
