The Politics of Civil Justice System Reforms: A Comparison of Consumer Bankruptcy Laws in English Common Law and European Civil Law Countries
By Timothy M. Bowman, Kent State University
Prepared for presentation at the Southern Political Science Association Conference January 8-11, 2004
Abstract Many countries have seen attempts at sweeping reforms of their consumer bankruptcy systems. Surprisingly, many of these reforms were either defeated or watered down. Most of these reforms include provisions that will make the discharge of consumer debts more difficult. This is especially true in English Common Law countries. Four countries, Australia, Canada, Great Britain and the United States, either passed or attempted to pass broad reforms in an apparent attempt to reduce the number of consumer bankruptcy filings. This paper will examine the reforms and the increases in consumer bankruptcy filings in these countries, by examining the histories of their bankruptcy systems and the resulting institutions, as well as the political factors involved in the reform attempt. The similarities and differences between these countries will be examined. Introduction Bankruptcy law is generally thought of as a purely economic or legal issue. While this may be true in the case of corporate bankruptcy law, few people realize that consumer bankruptcy is also, if not primarily, “social legislation.”1 Whereas corporate bankruptcies can perhaps have a greater effect on a country’s economy, individual consumer bankruptcies may not have such far-ranging effects. That is not to say that consumer bankruptcy law is not an important legal or economic issue, but consumer bankruptcy also has an important social aspect. The focus of this paper will be a comparison of the consumer bankruptcy systems in four English common law countries, the United Kingdom, the United States, Canada and Australia. These countries all have English common law legal systems, which means that they use a judicial system based upon precedence and tradition rather then on a civil code, and recently passed or considered sweeping reforms of their consumer bankruptcy systems. The common law originally developed under through an adversarial system in historical England from judicial decisions that were based in tradition, custom, and
Todd J. Zywick, "Bankruptcy Law as Social Legislation," Texas Review of Law and Politics 5, no. 2 (2001).
precedent.2 These countries also have market-based economies, which would lead one to believe that they would have harsher bankruptcy laws. In fact, Klapper (2001) found that countries with market-based economies developed corporate bankruptcy systems that included stronger creditor rights and consequently exhibited a greater use of formal bankruptcy procedures. 3 If, as noted by Klapper, countries with market-based economies afford creditors greater rights in corporate bankruptcy cases, it would stand to reason that the same would be true in consumer bankruptcy cases. However, as will be shown in greater detail below, this does not seem to be the case. Over the past two decades many industrialized countries encountered the problem of rising consumer over indebtedness and attempted to find a solution for this problem. This often led to a rapid growth in the number of consumer bankruptcy filings. In Canada, the number of bankruptcy filings almost tripled between 1985 and 1995.4 Australia saw an increase over 180% over the past decade. 5 The United States saw an increase to over 1,300,000 consumer bankruptcy filings in 1997, this put the bankruptcy rate at almost one filing for every 26 American households. 6 The United Kingdom also experienced similar increases, although it should be noted that a 1994 amendment, which made it more difficult to file for bankruptcy protection, caused a decrease in filings for a few years. Despite this change, from 1982 to 2000, there was a 600% increase in the number of individual bankruptcies filed in the United Kingdom. 7 It should be noted that
Henry Campbell Black, Black’s Law Dictionary, Sixth ed. (St. Paul, Minn.: West Publishing, 1990). Leora Klapper, "Bankruptcy around the World: Explanations of Its Relative Use.," (World Bank, 2001). 4 David A. Botwinik, Kenneth W. Weinrib, and American Bar Association. Section of International Law and Practice., European Bankruptcy Laws, 2nd ed. (Washington, D.C.: Section of International Law and Practice American Bar Association, 1986). 5 John and Mason Rosalind Duns, "Consumer Insolvency in Australia," International Insovency Review 10 (2001). 6 Ibid. 7 The Insovency Service, "Insolvency," (London: Department of Trade and Industry, 2001).
the British Parliament recently considered bankruptcy legislation that is intended to scale back the 1994 amendments.8 Consumer bankruptcy law has a long and interesting history. Many countries enacted laws at some point in their history that included imprisonment or even exile for debt. Some countries even went as far as putting debtors to death or cutting off their ears or hands. Most of the laws enacted were intended to protect creditors. Many states did not recognize consumer bankruptcy until the end of the 19th Century.9 The Puzzle This analysis of bankruptcy laws in English common law countries shows the position of consumer debtors improved considerably since the early laws. The debtor’s liability is now basically limited to the value of the bankruptcy estate, after the applicable exemptions have been taken, and the influence of creditors has been greatly reduced. This means that debtors will be able to retain more of their assets and be afforded greater protection against creditors. While the bankruptcy system in the United States is exceptional in it unique exemption laws, all four of these countries have developed bankruptcy system that afford significant protection to debtors, despite the fact that the original intent of these laws was to protect creditors and not debtors and that all four of these countries have market-based economies. Why have all of these countries developed these debtor-oriented bankruptcy systems? The answer may be found in the organizations themselves.
Ibid. Botwinik, Weinrib, and American Bar Association. Section of International Law and Practice., European Bankruptcy Laws.
The threshold question when studying the development of consumer bankruptcy law in English Common Law countries, is why these countries developed consumer system at all? It is clear from the history of the British and Canadian systems that prior to the enactment of their early bankruptcy legislation individual debtors were at the mercy of their creditors, who could seize their assets and ultimately have the debtor imprisoned or even exiled. It is also clear that the early systems were enacted to protect the creditors from the debtor’s attempts to hide their assets. So how do these systems evolve from early protections for creditors to systems that protected debtors and in some cases allowed debtors the opportunity for a fresh start? Comparison of Current Systems A brief explanation of the differences and similarities between these systems is necessary. As will be discussed in greater detail below, each of the countries considered in this paper has a legal system based upon the English common law. The common law originally developed under the auspices of the adversarial system in historical England from judicial decisions based in tradition, custom, and precedent.10 Common law may be unwritten or written in statutes or codes. The common law, as applied in civil cases (as distinct from criminal cases), was devised as a means of compensating someone for wrongful acts known as torts, including both intentional torts and torts caused by negligence. 11 The primary difference between common law and civil law is that, historically, common law was law developed by custom, beginning before there were any written
Black, Black’s Law Dictionary. Ibid.
laws and continuing to be applied by courts after there were written laws.12 Whereas civil law develops out of the Roman law of Justinian’s Corpus Juris Civilis proceeding from broad legal principles and the interpretation of doctrinal writings rather than the application of facts.13 Jacob Zeigel (1999) suggests that by looking at several factors one can compare consumer bankruptcy systems: (a) The requirements that must be met for a consumer to enter bankruptcy voluntarily, also known as standing. For example, is there a finding of insolvency required or is there a minimum amount of debt required? (b) The property that can be retained by the bankrupt, known as exemptions. For example can the debtor retain items needed for his or her occupation? (c) The alternatives to bankruptcy available to consumer insolvents. Can the debtor ask the Court to help him or her arrange a payment plan? (d) The possibility to reaffirm debts that would otherwise be subject to discharge. For example, can the debtor opt to retain his or her car and continue making payments, thereby taking this debt out of the bankruptcy? (e) The role of counseling prior to and during bankruptcy.14 Is the debtor required to undergo credit counseling prior to filing for bankruptcy? These issues are those which when compared can illustrate to nature of the systems being examined. A comparison of these factors can be found in the table set out below.
Ibid. "The Columbia Encyclopedia," (New York: Columbia University Press, 2001). 14 Duns, "Consumer Insolvency in Australia."
A Comparison of the Factors suggested by Zeigel United Kingdom Standing Debtor must file petition and statement of financial affairs, there is no minimum level of debt Work related assets; pension; Household needs United States Debtor must file petition and statement of financial affairs, there is no minimum level of debt The US is the only country that allows individual states to promulgate exemptions for cases within their jurisdiction.† Chapter 13 plans available through court. Plan is administered by the trustee Australia Debtor must file petition and statement of financial affairs, there is no minimum level of debt Household goods; work related assets; means of transport*; life assurance and retirement accounts*; personal injury damages* Debtor can negotiate with creditors (creditors make the decision) Canada Debtor must be insolvent and have debts of at least $1000.00
Household goods; one vehicle; works tools; clothing; and medical aids.
Reaffirmation of debt possible? Counseling
Debtor can negotiate with creditors or apply for a statutory consolidation of debt. (Creditors make the decision) No
Debtor can negotiate with creditors or apply for a statutory consolidation of debt. (Creditors make the decision) No
Debtor must file petition and statement of financial affairs, there is no minimum level of debt
Mandatory credit counseling not required ‡
Mandatory credit counseling not required
Mandatory credit counseling required
* † ‡
These exemptions are proposed in the reform legislation currently being considered. Many of the state exemptions differ from state to state, it is not possible to list them all. The United States has been considering including a mandatory counseling provision
The British Bankruptcy System The first known bankruptcy law was passed in England in 1542 to give creditors remedies (other than imprisonment) against debtors who did not pay their bills. Under this law, debtors were considered “quasi-criminals”. 15 In 1570, England passed its second bankruptcy law. Under this system only a creditor could commence a bankruptcy case, which means that bankruptcy was involuntary for the debtor. Under this system only merchants could be debtors. Non-merchant debtors were imprisoned. During the bankruptcy case, a bankruptcy commissioner, much like the modern trustee, seized the bankrupt's assets, sold them and distributed them pro rata to the creditors. At the end of the case, the debtor did not obtain a discharge of the balance, and so creditors could continue their collection efforts.16 Over the next 100 or so years, the British Parliament made a few changes to this bankruptcy law, primarily to let the commissioner take more of the bankrupt's assets and to increase penalties for noncompliance. A 1604 amendment permitted the debtor's ear to be cut off. In 1705, the British Parliament made sweeping changes to the bankruptcy laws. These changes included, a provision that a cooperative bankrupt could receive a discharge of the unpaid balance of his debts that a cooperative bankrupt would also be entitled to keep certain property based on the total value of his assets. These are the first exemptions. The changes also included a provision that an uncooperative bankrupt who was defrauding his creditors could be put to death, although records indicate that only five debtors were ever put to death during the 115 years this provision existed.
Botwinik, Weinrib, and American Bar Association. Section of International Law and Practice., European Bankruptcy Laws. 16 Ibid.
In 1880, the British Parliament passed the bankruptcy legislation that survived, although occasionally amended until the 1970’s when the Thatcher government supported a sweeping reform of the system. The reform eventually passed in 1985, albeit with quite a few amendments. The key question in the British bankruptcy reform was whether to privatize the system. Most of the privatization proposals failed.17 The Australian System The Australian bankruptcy system developed late in the country’s history, after it became independent. The system followed the British model. Australian law distinguishes between insolvency or personal and corporate debtors. Under the Commonwealth Constitution, the federal Parliament has the power to make laws with respect to bankruptcy and insolvency. The law dealing with personal bankruptcies is found in the Bankruptcy Act of 1966. Individual insolvency is regulated and often administered by the Insolvency and Trustee Service Australia, which is an executive agency under the jurisdiction of the Attorney General. A debtor may become bankrupt voluntarily by presenting a petition to an Official Receiver. This is the manner in which most consumer bankruptcy cases are initiated. The Australian Reform A 1998 study by the Regulation and Policy Department of Insolvency and Trustee Service Australia revealed that one fifth of the debtors who filed for bankruptcy protection in that country were in the age range of 25 to 29 years old. Sixty-two percent of the bankruptcies were filed by debtors younger than 39 years of age. Unemployment was the most mentioned cause of bankruptcy at forty-eight percent, followed by
Bruce G. Carruthers, Terence C. Halliday, and American Bar Foundation., Politics and Temporality : Agenda-Setting in United States and English Bankruptcy Law (Chicago, Ill.: American Bar Foundation, 1992).
excessive use of credit at eighteen percent and domestic discord at sixteen percent. Despite this finding, debtor abuse of the bankruptcy system has been cited by Australia policy-makers as the major cause of the dramatic increase in consumer bankruptcy filings and the underlying reason for reform legislation.18 The proposed reforms include granting courts the authority to annul bankruptcies that were filed fraudulently, establishing a mandatory 39 day cooling off period, during which time creditors will be able to contact the debtor in order to attempt to arrange for alternatives to bankruptcy. The reforms also include the current early discharge provision would be repealed, the trustee would be granted more authority to object to a debtor’s discharge, and making it easier for debtors to enter into “debt agreements” as an alternative to bankruptcy. 19 The Canadian System The first Canadian bankruptcy act was enacted in 1869, shortly after the Canadian Confederation was established.20 This first act only applied to the involuntary bankruptcy of businesses. Voluntary bankruptcies were handled by provincial systems, but these could not grant a discharge to individual debtors.21 The 1869 Act was repealed in 1880 and from that time until 1919, Canada did not have a federal bankruptcy law.22 In 1919 Canada adopted its first general bankruptcy act.23 The English Bankruptcy Act of 1914 influenced the1919 Canadian Bankruptcy Act, although there were several significant differences between the two laws. The most important
Duns, "Consumer Insolvency in Australia." Ibid. 20 Jacob S. Ziegel, "The Philosophy and Design of Contemporary Consumer Bankruptcy Systems: A Canada-United States Comparison," Osgoode Hall Law Journal 37 (1999). 21 Ibid. 22 Ibid. 23 Ibid.
difference for our purposes is that the Canadian systems applied to insolvent companies as well as individual debtors, whereas the British Act only applied to individuals. The 1919 Act introduced a very simple procedure that allowed individuals to put themselves into bankruptcy without the need for a court order, although proof of the debtor’s insolvency was required. 24 The Canadian Bankruptcy Reform The 1992 Canadian bankruptcy reform efforts are also driven by the belief that bankruptcy is too easy and that the current system is damaging the credit system.25 The proposed reforms are intended to make discharge in bankruptcy a much less attractive option. The Canadian reforms have come under criticism for ignoring the roots of problem and the contribution of the credit industry to the increase in filings. 26 The Canadian Legislature established an advisory committee, which in turn established several smaller subcommittees to address bankruptcy reform. The group established to address consumer bankruptcy proposals, included bankruptcy officials and creditors, but no debtor representatives, or social scientists.27 In fact the group included only a few trustees. The group main stated goal was to encourage consumers to avoid the bankruptcy option. In light of this main goal, the group proposed several reforms. These proposals included requiring the trustee to fix an amount of the debtors total income to be paid over to the trustee, allowing the trustee to grant conditional discharges, allowing creditors to object to discharge for similar grounds as those granted
Ibid. Jacob S. Ziegel, "Canadian Perspectives on the Challenges of Consumer Bankruptcies," Journal of Consumer Policy 20 (1997). 26 Ziegel, "The Philosphy and Design of Contemporary Consumer Bankruptcy Systems: A Canada-United States Comparison." 27 Ziegel, "Canadian Perspectives on the Challenges of Consumer Bankruptcies."
to the trustee, and perhaps most significantly requiring the court to take the bankrupt’s payment record and the fact that the bankrupt choose the bankruptcy option into account, when considering discharge. 28 The United States System In the United States, bankruptcy legislation is federal law. The first bankruptcy law was enacted in 1800, but was repealed three years later. 29 The original American bankruptcy system had been modeled after the English system at the time and only applied to merchants. The next federal act was passed in 1841. Due to the absence of federal bankruptcy legislation, some states adopted their own laws, some of which included the possible granting of a form of discharge. The Bankruptcy Act of 1898 included a provision that granted wage earners a discharge but required them to go through bankruptcy, which was costly and carried a stigma, at the time. In 1938 the Chandler Act amended the United States Bankruptcy System including a provision that made wage earner plans, which are the most common form of personal bankruptcies, less costly and more flexible. 30 In the 1970’s the United States, as well as the United Kingdom began to look into reforming their bankruptcy systems. Both countries established commissions to examine their systems and make recommendations for reform. The United States focused on making the process faster and more efficient. The United Kingdom focused on privatizing the process. In the United States the Bankruptcy Reform Act of 1978 replaced the 1938 Act and created a completely new bankruptcy code. One of the most
Ziegel, "The Philosophy and Design of Contemporary Consumer Bankruptcy Systems: A Canada-United States Comparison." 29 Botwinik, Weinrib, and American Bar Association. Section of International Law and Practice., European Bankruptcy Laws. 30 Ibid.
substantial changes in the new act was the creation of a general stay, which means that creditors are barred from taking any action against the debtor once the bankruptcy petition had been filed, that included all proceeding against the debtor including those by secured creditors. This had the effect of making bankruptcy a much more attractive option in the United States. 31 . While it is customary in most systems to allow a debtor to claim some exemptions, the United States and its allowance of state legislated exemptions is different from all of the other systems. In 1994 the newly elected Republican majority passed the 1994 Bankruptcy Reform Act that created the National Bankruptcy Review Commission. The National Bankruptcy Review Commission worked on its report for two years and held hearings in different places around the country. The Commission released its report in October of 1997. For the next several years, bankruptcy reform legislation has been introduced in Congress. The provision of these bills, which have remained almost identical, all set out below. The American Reform The proposed bankruptcy reform bills would institute a number of changes to the system just described. These changes would almost certainly reduce the number of bankruptcy filings and increase the payouts to non-priority unsecured creditors; these are usually credit card companies. The proposed changes include: means testing, exceptions to discharge and loan bifurcation. Means testing is the most far reaching of the proposed changes from the current law. Means testing is a new standard that would create a presumption of abuse of the
Carruthers, Halliday, and American Bar Foundation., Politics and Temporality : Agenda-Setting in United States and English Bankruptcy Law.
bankruptcy system and would deny relief to debtors who fail the means test. The test works as follows: First the debtor’s monthly income is computed. This is an average of the debtor’s monthly income over the six-month period prior to the filing of the bankruptcy petition. Second, the amount of the total priority debts are divided by 60, the scheduled payments on secured debts over the next 60 months are divided by 60, the amount of any arrears on secured debts, monthly expenses as allowed by the Internal Revenue Service, and hypothetical Chapter 13 administration expenses, if any; all are subtracted from the monthly income. If the debtor has enough monthly income left over to pay 25% of the non-priority unsecured debts, then the debtor is presumed to be abusing the bankruptcy system. The trustee must move to dismiss the case or file a report explaining why the case should not be dismissed. If the debtor’s and the debtor’s spouse’s monthly income is less than the state median income, which in Ohio, for example, is $41,000.00, then the means test would not apply, although the debtor would still be required to submit the same information. Since the means test is set at the median income level, then half of all families in the country would be impacted by this change. If a motion to dismiss is filed the court must grant it, unless the court finds that special circumstances exist which warrant continuation of the case. Under Chapter 13, the debtor would also be required to dedicate all of his or her available income, as calculated under the means test, to unsecured debt, even if the debtor’s expenses are reasonable, but exceed the IRS standard.32
HR 333 (2001)
It seems fairly clear the American attempt at bankruptcy reform started out as a general grievance held by groups of unsecured creditors, particularly banks and credit card companies. These groups represented the creditors who would be least likely to be paid out of a Chapter 7 bankruptcy estate, so it is clear why they would want the law changed. These groups would have eventually specified their demands, which they did with the idea of means testing. The concept of means testing has been around for a long time and has been suggested as a necessary element of bankruptcy law. The issue came up during the debates on the 1994 Bankruptcy Reform Act, which created the National Bankruptcy Review Commission. The Commission itself discussed the idea and rejected it. 33 The credit card companies and their associates began to expand the concepts of means testing and bankruptcy reform in the early 1990’s, by couching the debate in term of personal responsibility; this helped to get other groups involved, such as small businesses and credit unions. An interesting aspect of the current attempt at bankruptcy reform is the apparent resistance to the proposals. Despite having passed both houses of Congress on several occasions over the past four years the reforms have not be enacted. The Role Of Ideas Economic factors surely play a role in the development of bankruptcy systems. In previous literature, La Porta, Lopez-de-Silanes, Shleifer, and Vishny, (1999) examined cross-country differences in the quality of laws, regulations and enforcement, including
Iain Ramsay, "Model of Consumer Bankruptcy: Implications for Research and Policy," Journal of Consumer Policy 20 (1997).
bankruptcy regimes.34 They found that stronger judicial systems and investor protection encourages the development of financial markets and that countries that better protect creditors have larger credit markets.35 Klapper (2001) found that bankruptcy use is greater in market-oriented financial systems, which are characterized by weaker and more numerous banking relationships.36 La Porta, et al. found a relationship between the legal origins of a country and the protection offered to creditors. 37 Each of the consumer bankruptcy systems in these countries realized that it needed to protect individuals from the potentially far-reaching effects of allowing their citizens to become completely destitute, with little hope of recovery, particularly in market-oriented countries such as the English law countries. But it is equally clear that societal factors also played a role. Donna McKenzie Skene, in her text, Insolvency Law in Scotland, (1999) argues that the gradual change to a more liberal attitude toward insolvent debtors appears to be recognition on the part of the Parliament that in a creditbased society debtors deserve a greater degree of sympathy from the system.38 The Australian system, which borrowed heavily from the older British system, also saw a gradual move from the protection of creditors’ rights to the protection of debtors.39 Many scholars have debated the role ideas play in the making of public policy. One of the most interesting aspects of this debate is the question of whether ideas affect policy-makers or whether policy-makers affect ideas. Some scholars argue that it is interests that use ideas to frame and justify the policies they are advocating.
Rafael La Porta, et al., "Legal Determinants of External Finance," Journal of Finance 52 (1999). Klapper, "Bankruptcy around the World: Explanations of Its Relative Use.." 36 Ibid. 37 La Porta, "Legal Determinants of External Finance." 38 Donna W. McKenzie Skene, Insolvency Law in Scotland (Edinburgh: T&T Clark, 1999). 39 Duns, "Consumer Insolvency in Australia."
Ideas can play a major role in public policy, by shaping the definitions and structures of power. Hilary Appel in her article “The Ideological Determinants of Liberal Economic Reform” (199) explained the role ideas or ideologies could play, stating that ideas can affect the legitimacy of a policy. 40 Appel discusses the ideological context as an important aspect of policy making. The ideological context is a shorthand definition for the ideas held by members of elite groups. The basic premise of this theory is that the belief system held by policy makers and interested groups or individuals shapes the policy making process. This may occur in several ways, the ideological context may shape the definitions used to describe the issues, it may define the roles played by the various actors, and it may control whether a particular issue reaches the agenda.41 An excellent analysis of the debate can be found in John L. Campbell’s “Institutional Analysis and the Role of Ideas in Political Economy” in The Rise of Neoliberalism and Institutional Analysis. (2001) Campbell classifies ideas into four basic types; programs; paradigms; frames, and public sentiments. Campbell tells us that “programs” are ideas as elite policy presentations that help policy makers to chart a clear and specific course of policy actions. Paradigms are ideas as elites assumptions that constrain the cognitive range of useful solutions available to policy makers. Public sentiments are ideas as public assumptions that constrain the normative range of
Hilary Appel, "The Ideological Determinants of Liberal Economic Reform: The Case for Privatization," World Politics 52 (2000). 41 Ibid.
legitimate solutions available to policy makers. Frames, finally, are ideas as symbols and concepts that help policy makers to legitimize policy solutions to the public.42 Campbell argues that each type of idea plays a unique role in policy making. What Campbell is saying is that ideas can both help and constrain policy makers, because they limit the number of options available to the policy makers, while at the same time helping a policy maker to frame a policy in such a way that it will be acceptable to the public.43 A good example of the use of ideas in the development of bankruptcy law, at least in the United States is the concept of the “fresh start”, which was one of the main principles embedded in the 1978 reform act. In the case of bankruptcy laws, public sentiments have played an important role in the evolution of the systems in each of the countries examined herein. Each of these countries experienced a change in their bankruptcy systems from creditor-oriented systems to debtor-oriented systems. Why has this occurred? It seems that interests alone cannot explain the answer to this question. If the solution to this puzzle were that interests have affected the evolution of these systems, then there would be some evidence of mobilized groups in support of these changes. For many reasons this appears to be unlikely. In fact the opposite is true, the interests who have mobilized in each of these countries have been in support of restricting bankruptcy laws. It is unlikely that groups of debtors have mobilized in order the change the focus bankruptcy systems. When these countries have reformed their bankruptcy systems, debtors groups and even debtors’ counsel have been shut out of the process.
John L. Campbell and Ove Kaj Pedersen, The Rise of Neoliberalism and Institutional Analysis (Princeton, N.J.: Princeton University Press, 2001). 43 Ibid.
The Role of Institutions A historical institutional analysis is important when looking at this topic. Clearly the type of legal system used in these countries was an important factor in considering how these systems developed the way they have. Historical institutionalism is basically the idea that policy choices made when an institution is being formed will have a long lasting effect on that policy far into the future.44 The common law system itself is the institution that largely influences the development of bankruptcy law in these countries. As Klapper (2001) found, the relative number of bankruptcies filed in common law countries is significantly higher than those in either Germanic or French civil law systems.45 This is most likely due to the differences in the way the legal systems operate. Where the English based bankruptcy systems are the product of a long history of legal tradition, the civil law based countries are relatively new to bankruptcy law. Organizational institutionalism is a variant of institutionalist theory. Organizational institutionalism is concerned with how organizations, such as the bankruptcy system described in this paper, changed their institutional practices as new cultural scripts and schema diffused through organizational environments.46 Organizational theorists (e.g. Sommers 1995) have long argued that both rational choice and historical institutionalists systematically neglected the importance of norms, cognitive forms and belief systems. 47 They argued that these factors controlled whatever tendencies might exist for actors to build institutions on the basis of their self-interest.
B. Guy Peters, Institutional Theory in Political Science: The ’New Institutionalism’ (London: Continuum, 2001). 45 Klapper, "Bankruptcy around the World: Explanations of Its Relative Use.." 46 Campbell and Pedersen, The Rise of Neoliberalism and Institutional Analysis. 47 Margaret R. Somers, "What’s Political or Cultural About Political Culture and the Public Sphere? Toward an Historical Sociology of Concept Formation," Sociological Theory 13, no. 2 (1995).
The intriguing aspect of organizational institutionalism is its concern regarding how the self-interested actors involved are constrained by socially constructed and cultural influences. A study of comparative consumer bankruptcy or insolvency systems would necessarily include an analysis of the organizations that developed.48 As Pierson (1996) points out in his oft cited work on social welfare systems, once legislation such as consumer bankruptcy law, has been passed and enacted, an organization will develop to support this system. 49 In the case of bankruptcy systems, a field of bankruptcy specialists developed inside and outside of the system. There are of course legal professionals who practice law in the field. There are also other private administrators, most often known as trustees, who are employed either by the court or by debtors. There are also the normal actors involved in any judicial system, judges, clerks and security personnel. All of these actors will quickly become self-interested and therefore tied to the success and often the continuation of the system. Organizational institutionalism may best explain this puzzle. In the case of bankruptcy law, which as previously stated was originally intended to protect creditors from both debtors and other creditors, it seems that the most obvious explanation must lie within the organizations which have developed to support and operate the bankruptcy system. As mentioned earlier it is unlikely that debtors themselves would band together and mobilize in their common interest, and even if they had, it is unlikely that they would have been very effective. So where did support for the liberalization of these bankruptcy systems come from? The answer may be from the systems themselves. Pierson’s argument that organizations are both self-interested actors and institutions works well in
Campbell and Pedersen, The Rise of Neoliberalism and Institutional Analysis. Paul Pierson, "The New Politics of the Welfare State," World Politics 48, no. 2 (1996).
this case. If we can assume that the bankruptcy organizations in each of these countries would work in their own interest and attempt to perpetuate the systems and protect its resources, then might we also assume that these organizations will realize the integral role of the debtors? Legislation meant to make it harder to file for bankruptcy protection, would be detrimental to the bankruptcy organizations. This may explain why the sweeping reforms attempted by each of these countries have been met with limited success. Conclusion Of the four bankruptcy systems looked at, the American system is by far the most liberal and affords debtors the greatest amount of protection. The most conservative is the Canadian system. If the American reform proposals eventually pass, the system will be more like to the Canadian system, in fact it seems clear that the American proposals borrow much from the Canadian system. As mentioned earlier the United Kingdom is actually considering changes that would make that system more debtor-friendly. However, the point of this paper is that these changes in the systems, moving back and forth between more liberal or more conservative provisions, all stem from a fairly liberal legislation. All of these countries have “fresh start” systems with limited creditor rights. This analysis becomes more obvious when one considers that many countries have systems which do not include discharge at all or require the debtors to pay a substantial portion of their debt, as is the case under the German Insolvenzordung, and wait for up to seven years before they are granted a judicial discharge of debt. There are still countries, such as Spain, Greece and Portugal, which do not yet grant a judicial discharge.50 It has
Nick Huls, "Overindebtedness of Consumers in EC Member States," Journal of Consumer Policy 17 (1994).
been suggested that in welfare states such as Germany there is less of a need for consumer bankruptcy protection, then there is in the United States, this may help to explain the development of the more debtor-friendly system in the United States.51 An enlarged analysis of the differences between the common-law and civil law systems is needed.
Hortense Trendelenburg, "Discharge in Germany from an International Point of View," International Insolvency Review 9 (2000).
Bibliography Appel, Hilary. "The Ideological Determinants of Liberal Economic Reform: The Case for Privatization." World Politics 52 (2000): 520-49. Black, Henry Campbell. Black’s Law Dictionary. Sixth ed. St. Paul, Minn.: West Publishing, 1990. Botwinik, David A., Kenneth W. Weinrib, and American Bar Association. Section of International Law and Practice. European Bankruptcy Laws. 2nd ed. Washington, D.C.: Section of International Law and Practice American Bar Association, 1986. Campbell, John L., and Ove Kaj Pedersen. The Rise of Neoliberalism and Institutional Analysis. Princeton, N.J.: Princeton University Press, 2001. Carruthers, Bruce G., Terence C. Halliday, and American Bar Foundation. Politics and Temporality : Agenda-Setting in United States and English Bankruptcy Law. Chicago, Ill.: American Bar Foundation, 1992. "The Columbia Encyclopedia." New York: Columbia University Press, 2001. Duns, John and Mason Rosalind. "Consumer Insolvency in Australia." International Insovency Review 10 (2001): 195-228. Huls, Nick. "Overindebtedness of Consumers in EC Member States." Journal of Consumer Policy 17 (1994): 87-116. Klapper, Leora. "Bankruptcy around the World: Explanations of Its Relative Use." 1-20: World Bank, 2001. La Porta, Rafael, et al. "Legal Determinants of External Finance." Journal of Finance 52 (1999): 1131-50. McKenzie Skene, Donna W. Insolvency Law in Scotland. Edinburgh: T&T Clark, 1999. Peters, B. Guy. Institutional Theory in Political Science: The ’New Institutionalism’. London: Continuum, 2001. Pierson, Paul. "The New Politics of the Welfare State." World Politics 48, no. 2 (1996): 143-79. Ramsay, Iain. "Model of Consumer Bankruptcy: Implications for Research and Policy." Journal of Consumer Policy 20 (1997): 269-87. Service, The Insovency. "Insolvency." 1-23. London: Department of Trade and Industry, 2001. Somers, Margaret R. "What’s Political or Cultural About Political Culture and the Public Sphere? Toward an Historical Sociology of Concept Formation." Sociological Theory 13, no. 2 (1995): 113-44. Trendelenburg, Hortense. "Discharge in Germany from an International Point of View." International Insovency Review 9 (2000): 111-20. Ziegel, Jacob S. "Canadian Perspectives on the Challenges of Consumer Bankruptcies." Journal of Consumer Policy 20 (1997). ———. "The Philosophy and Design of Contemporary Consumer Bankruptcy Systems: A Canada-United States Comparison." Osgoode Hall Law Journal 37 (1999): 205-38. Zywick, Todd J. "Bankruptcy Law as Social Legislation." Texas Review of Law and Politics 5, no. 2 (2001): 393-430.