Stanford/Yale Junior Faculty Forum

Research Paper 01-07

2001

The Rise and Fall of Entrepreneurs: An Empirical Study of Individual Bankruptcy Petitioners in Israel

Rafael Efrat Department of Business Law, California State University, Northridge

This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://papers.ssrn.com/paper.taf?abstract_id=275473 THE RISE AND FALL OF ENTREPRENEURS: AN EMPIRICAL STUDY OF INDIVIDUAL BANKRUPTCY PETITIONERS IN ISRAEL

Rafael Efrat*

ABSTRACT:

This Article addresses two fundamental areas of inquiry in personal bankruptcy. First, it examines what conditions justify an expansive vs. stringent bankruptcy debt relief regime in a given country. Second, the article examines what contributes to the particular profile composition of individuals in bankruptcy.

The author hypothesizes that the scope of the fresh-start policy and the composition of the bankruptcy population in a given country is predicated on government’s predisposition towards credit deregulation, the extent of the welfare state and the standards employed by financial institutions when extending credit to the private sector.

To test this hypothesis, the author has undertaken an empirical study of consumer bankruptcy filings in Israel examining the characteristics of the petitioners and the causes of filings. By comparing the findings of this undertaking with the results of similar empirical studies in the United States and Canada, this Article provides strong support for the suggested three-prong hypothesis.

A. INTRODUCTION:

This Article addresses two fundamental areas of inquiry in personal bankruptcy.

First, it examines what conditions justify an expansive vs. stringent bankruptcy debt relief regime in a given country. For example, currently pending in Congress is a major reform legislation of the personal bankruptcy in the United States.1 The underlying premise of much of the reform is the notion that the rather expansive debt relief regime available to

* Assistant Professor, California State University, Northridge. J.S.D. Candidate, Stanford Law School; J.S.M., 1998, Stanford Law School; J.D., 1992 University of Southern California Law Center. The author expresses his gratitude to Professors Elizabeth Warren, Harvard Law School, George Triantis, Chicago Law School, Lawrence Friedman, Stanford Law School, William Whitford, Wisconsin Law School, Marianne B. Culhane & Michaela M. White, Creighton University, Ron Harris, Tel Aviv University, and participants at the Stanford/Yale Junior Faculty Forum.

1 individuals in the United States is ill conceived as it promotes widespread abuse.2

Proponents of the broad fresh-start policy of the existing bankruptcy law regime in the

United States cite to evidence suggesting that the vast majority of petitioners in the

United States are in dire financial need3 and there is little, if any, evidence of abuse.4 To add clarity to this fundamental and ongoing public debate, this study aims to provide a model that, depending on the underlying circumstances in a given country, could be used to justify an expansive or, in the alternative, a stringent fresh-start policy in bankruptcy.

Second, the Article examines what contributes to the particular profile composition of individuals in bankruptcy. Studies in the United States have demonstrated that the average bankruptcy petitioner resembles a fair cross section of the population a whole. American households who resort to bankruptcy are similar to American middle class households in terms of employment status, citizen status, ethnicity, race, gender, marital status and age.5 In contrast, Canadian bankruptcy petitioners are demographically similar to the Canadian population as a whole in terms of age, gender and marital status,

1 See House, Senate Approve Sweeping New Law; Conference