Protection for Whom? Creditor Conflict and Bankruptcy

In the absence of a bankruptcy law, private debt collectionremedies generally result in an ad hoc disposal of the debtor'sassets, which reduces the aggregate value of creditors' claims.We show that creditors will often choose not to write privatecontracts that would prevent this inefficient behavior, eventhough these contracts would be to the mutual benefit of allcreditors. Our analysis therefore provides an economic rationalefor the existence of a bankruptcy law that makes a collectiveresolution compulsory for all creditors. We argue that sucha mandate is a requisite part of any effective bankruptcy system,including proposals for market-based resolutions of insolvency.