This weekend was the annual meeting of the American Law & Economics Association (ALEA).  It was a two-day conference at Harvard Law School, with five concurrent panels of three presenters for each time slot.  Although the topics ranged from plea bargains to family law to referees in the NBA, there was almost always a bankruptcy or contracts panel taking place.  (I knew I was on the right track because the sessions I wanted to see were all in the same room.  I got to know Pound 102 quite well.)

I saw too many presentations to recount all of them, so I’ll summarize briefly three papers I think will be of particular interest to Credit Slips readers. 

Ed Morrison (Columbia) is
continuing his fascinating work on small businesses in bankruptcy.  His
current finding is that a very small percentage of businesses that
exited the market did so through bankruptcy, and he profiled the
characteristics of the businesses that did use Chapter 11.
Interestingly, though he found variables (such as the presence secured
debt) that businesses who used bankruptcy shared at a significant
level, many of the other businesses he studied had those same
characteristics as well.  The result I found most interesting is that
states with high rates of small business filings also have high rates
of consumer filings.  Is this because so many small business owners in
bankruptcy file consumer petitions as well?  Or because so many small
businesses file in Chapters 7 and 13 that the numbers in
all three chapters are really describing the same event?  Or perhaps
it’s because of generally slow economies in those regions.  We hope to
have more information on those questions after we get the data from the
current Consumer Bankruptcy Project.

Douglas Baird (Chicago)
also presented a paper on small businesses in bankruptcy.  His results
provide a nice juxtaposition to Ed Morrison’s.  Even though the vast
majority of small businesses that exit the market do not use
bankruptcy, those that do still make up the overwhelming majority of
businesses in Chapter 11.  The very smallest businesses, which
represented the largest category of filers in the study, are so small
that they frequently do not even have secured creditors.  Their major
creditor is typically the IRS, often because the owners have taken
funds from their employee payroll tax accounts, presumably in a
desperate attempt to keep the business afloat.  That’s an unsettling
picture, to say the least.

Michelle White (U.C., San Diego)
presented on consumer bankruptcy.  She credits the tremendous rise in
credit card debt for the correspondingly large rise in consumer
bankruptcy filings over the past few decades, although BAPCPA has
(temporarily, in my view) dislodged that relationship.  (Since BAPCPA,
credit card debt continues to soar, while filings are down.  Whether
they stay down remains to be seen.)  She proposed an empirical project
that would distinguish between debtors who land in bankruptcy because
of difficulties managing credit cards in light of cognitive biases and
those who seek bankruptcy through strategic planning. 

These descriptions, of course, do not do the authors justice.  Michelle
White’s paper is available through the ALEA conference site.  Ed Morrison and Doug Baird have
related papers on SSRN.