Economía

Fischer, Ronald D.
Castellanos, Sara G. (Sara Gabriela), 1968-
Comments
Economía - Volume 6, Number 1, Fall 2005, pp. 199-213

Brookings Institution Press

Bankruptcy Law in Latin America: Past and Future M odern economic theory increasingly recognizes the relevance of legal and institutional structures for the functioning and development of the economy. Bankruptcy laws are a crucial element of such institutions. This paper examines the laws that govern corporate bankruptcy procedures, their effects on the economic environment, and the recent bankruptcy reforms in Latin America, with a focus on Brazil. Firms take on debts for several reasons. They generally intend to repay these debts with their future gains, but there is always the possibility that the borrowing firms will not fulfill the repayment promise. Bankruptcy law determines what happens in such circumstances. In the absence of a bankruptcy law, creditors have two legal procedures at their disposal. In the case of secured loans, creditors can seize the firm’s assets that serve as collateral for their loans. In the case of unsecured loans, creditors can go to court asking to sell some of the firm’s assets. This method of debt collection runs into difficulties when there are many creditors and the debtor’s assets do not cover its liabilities (that is, when the firm is insolvent). Under these conditions, each creditor will try to be the first to recover its debts. This uncoordinated race of creditors may lead to the dismantling of the firm’s assets and a loss of value for all creditors. It is in the collective interest of creditors, and of society at...