Research Handbooks in Law and Economics series
Edited by Kenneth Ayotte and Henry E. Smith
Chapter 10: Bankruptcy as Property Law
Barry E. Adler What must bankruptcy law be? As it turns out this question has a simple answer. There is exactly one function bankruptcy law must serve. It must govern mutually insupportable obligations. Or, one might say, any law that governs mutually insupportable obligations is bankruptcy law. That is, bankruptcy law is property law. To understand this claim, consider first what almost anyone would see as a typical bankruptcy setting. A borrower arrives on hard times, unable to repay her debts in full and with liabilities that exceed her assets. Her creditors seek to collect, but cannot get blood from a stone, so not all of them will succeed; i.e., the debtor is insolvent. There are many things that bankruptcy law could do in response to this debtor’s financial crisis. The law could, for example, stay the creditors’ individual collection efforts in favor of a collective process and discharge the debtor from her obligations, in whole or in part. Indeed American bankruptcy law does each of these things for individual and corporate debtors. But the law needn’t do either. There is only one thing bankruptcy law must do, if there is to be law at all in this situation: it must decide which of the creditors, if any, gets the debtor’s assets. Put another way, because creditors of an insolvent debtor have conflicting claims against assets, bankruptcy law must establish which of the creditors has a superior interest in those assets. This is a function of property law too. This...
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