The low usage of bankruptcy procedures: A cultural problem? Lessons from Spain

• Main Author: GURREA-MARTINEZ, Aurelio
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2020
• Subjects: Bankruptcy rates; Insolvency proceedings; Risk aversion; Culture; Institutions; Entrepreneurship; Access to finance; Economic growth; Bankruptcy Law; Commercial Law
• Online Access: https://ink.library.smu.edu.sg/sol_research/3251; https://ink.library.smu.edu.sg/context/sol_research/article/5216/viewcontent/The_Low_Usage_of_Bankruptcy_Procedures_A_Cultural_Problem_Lesso.pdf
• Institution: Singapore Management University

While filing for bankruptcy does not seem appealing for any debtor regardless of the jurisdiction, the reluctance to use the bankruptcy system varies across countries. This article explores the underlying reasons and economic effects of the low usage of bankruptcy procedures in Spain, where the rate of business bankruptcies is one of the lowest in the world. Some authors have argued that the low usage of bankruptcy procedures in Spain is due to a “cultural” problem faced by Spanish entrepreneurs. According to this hypothesis, the lack of a “bankruptcy culture” makes Spanish entrepreneurs afraid to use the bankruptcy system. In this article, however, I advocate for a totally different hypothesis. In my opinion, the low rate of business bankruptcies in Spain is not due to a “cultural” problem but to an institutional one. Namely, I argue that the low rate of business bankruptcies is better explained by the unattractive insolvency regime for debtors and creditors traditionally existing in Spain, as well as other legal and institutional factors including a creditor-friendly corporate law, an efficient mortgage system, a rigid labor law, and a poor law of secured transactions. All these factors encourage both debtors and creditors to avoid the use of insolvency proceedings either by minimizing the risk of insolvency or by postponing—and, if possible, even avoiding—the bankruptcy system once a debtor becomes insolvent. By exploring the underlying reasons for the low usage of the bankruptcy system in Spain, this article seeks to contribute to the general understanding of the low rate of business bankruptcies around the world while assessing the economic effects potentially associated with a low usage of insolvency proceedings. The article concludes with several recommendations to enhance the attractiveness of Spanish bankruptcy procedures.