Abstract

The importance of bankruptcy laws for the development of debt instruments, as well as for financial markets in general, is well-known. Bankruptcy policies establish a formal procedure that may be initiated whenever a debtor is unable to meet contractual obligations to creditors. The procedure is designed to redistribute the rights to control the debtor firm and the rights to appropriate the income stream generated by it. When properly designed and implemented, bankruptcy mechanisms are believed to enhance economic efficiency by allowing the timely exit of unproductive economic units and regulating the transfer of the ownership of productive assets to more qualified entrepreneurs. Inadequate bankruptcy mechanisms, however, may cause excessive liquidation of assets or act as barriers to exit.