Bankruptcy Reform: Better Late than Never

Recently, Simeon pointed out the need for a good bankruptcy regime as part of the crisis response: "No matter how successful fiscal stimulus packages and other crisis response measures might be, there will soon be a flow of corporate bankruptcies." Unfortunately, reforms of this magnitude take time to implement, so governments end up resorting to more interventionist measures (as Simeon points out in his post). New research suggests that it's not impossible to reform in the midst of crisis, though.

Writing in the Finance & PSD Impact newsletter, Xavier Gine and Inessa Love report that Colombia managed to carry out a successful reform of its bankruptcy code in late 1999:

In the midst of (a previous) financial crisis, facing a backlog of failing businesses entering a very inefficient bankruptcy process, Colombia adopted a new reorganization code in late 1999. This law, known as Law 550, streamlined the reorganization process by establishing shorter statutory deadlines for reorganization plans, reducing opportunities for excessive appeals by debtors (who typically delayed the process in order to suspend the debt service) and requiring mandatory liquidation in cases of failed negotiations.

Gine and Love find that the new law increased the efficiency of Colombia's bankruptcy system and conclude that "a financial crisis provides a good opportunity for serious bankruptcy reform." I think this overstates the case a bit since we're only dealing with a single data point - a crisis can also create a sense of urgency that overrides careful consideration of costs and benefits. Perhaps "better late than never" would be a more fitting conclusion. Nevertheless, the finding is reassuring for other countries that will soon be facing their own wave of bankruptcies.