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We examine entrepreneurial activity following the staggered adoption of modern-day fraudulent transfer laws in the United States. These laws strengthen unsecured creditors’ rights and are particularly important for entrepreneurs whose personal assets commingle with the firm’s. Using administrative data from the U.S. Census Bureau, we document declines in startup entry—particularly among riskier entrants—and closures of existing firms after these laws pass. Firm financial data shows that entrepreneurs lower leverage by reducing demand for unsecured credit. Our results suggest that strong creditor protections can limit entrepreneurs’ appetite for risk, which may reduce churning along the extensive margin among the smallest firms in the economy.

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In Chapter 11, litigation against former owners, managers, and financiers can eventually generate proceeds for the bankruptcy estate. These litigation claims have become significant, especially as more bankruptcies involve allegations of wrongdoing on the part of private equity sponsors. For unsecured creditors, who often receive paltry recoveries, litigation claims can be particularly valuable. Unsecured creditors are a diverse group, however, and it can be hard to meaningfully aggregate their preferences over whether and how to pursue litigation. This complicates the role of the Official Committee of Unsecured Creditors, which has a fiduciary duty to general unsecured creditors. The ideal creditor to pursue litigation in bankruptcy would lack liquidity constraints, be able to gather resources and assess risk, and have experience with the bankruptcy process. Although hedge funds fit the bill, this Note shows that they rarely serve on the Official Committee, even if their involvement could benefit all unsecured creditors. A recent case against hedge fund manager Daniel Kamensky that resulted in a prison sentence will only deter them further. I propose that courts should empower hedge funds in limited circumstances involving significant litigation claims by allowing multiple Official Committees, with fiduciary duties only to the unsecured creditors on a given committee.