The Leniency of Personal Bankruptcy Regulations in the EU Countries

Abstract

Discussions on personal bankruptcy regulations are usually focused on the controversial effects of leniency on society, economy, financial markets, entrepreneurship, and labour supply. However, the methodology of measuring leniency has been limited to one-time legislative changes or some elements of the US personal bankruptcy system. In contrast, we create a composite index of personal bankruptcy legislations. We calculate the composite index for 25 EU countries and the US as a benchmark, validate the results, and rank the countries according to the leniency of their personal bankruptcy systems. We analyse the index scores by region, law origin, and the age of the regime. We conclude that the systems show high heterogeneity and cannot be clustered by region or legal origin assumed based on former studies. However, there is a strong association between leniency and the age of legislation. Results indicate that personal bankruptcy policies in the EU are usually launched as creditor-friendly and are later shifted to a more lenient direction.

How does the leniency of personal bankruptcy law affect entrepreneurship in EU countries?

“…Although the EU countries have very heterogeneous personal bankruptcy systems [ 7 ], no extensive research on the association between leniency and entrepreneurial development in the whole EU has been done. Previous studies did not incorporate complex bankruptcy variables varying in time.…”

“…Besides relevant regulatory changes in the tax system, the labor market, or subsidies, an opportunity for policymakers to influence the risk-reward profile of potential investors and thus entrepreneurship is to modify the leniency level of personal bankruptcy legislation [ 2 , p.31]. The leniency of a personal bankruptcy system is a synthesizing term; it shows “how the system handles the defaults of private individuals and entrepreneurs with unlimited liabilities, how easy or difficult it is for borrowers to achieve a fresh start, and additionally, how harsh or lenient various possible stigmas are after receiving a fresh start” [ 7 , p.2]. Personal bankruptcy systems and their leniency elements–such as conditions for a fresh start, conditions of discharge, exemptions–have become crucial factors for policymakers and researchers to analyze the impact of differences or changes in leniency on the level of entrepreneurship cross-time or cross-countries (among the US-federal states).…”

“…However, these studies were typically limited to focus on the impact of either 1) a one-time event of a specific legislative change, typically big reforms of systems in the US or Europe; or 2) regional differences in some selective elements, like homestead exemptions, judicial customs of the US federal system, or some selected discharge-variables of the legislation of the selected countries. The research gap to create a complex measure of leniency was filled by Walter and Krenchel [ 7 ] who created a composite index of personal bankruptcy legislation and measured and compared the levels of leniency of 25 EU countries and the US as a benchmark for 2020. The development of the leniency index and the validation of the countries’ leniency levels created an opportunity to fill an additional gap in the entrepreneurial literature: to analyze the association between personal bankruptcy systems reforms and entrepreneurship cross-time and cross-country.…”

“…As a starting point, we take the results of the Walter and Krenchel leniency index [ 7 ] for 2020, then we determine and measure the changes in the indices of the EU countries from 2000 to 2019. We examine the association of changes in leniency levels and changes in self-employment data with a panel regression.…”

Drivers of Individual Credit Risk of Retail Customers—A Case Study on the Example of the Polish Cooperative Banking Sector

“…Contemporary economic concepts from the field of game theory, behavioral approach or currents of institutional economics indicate this. These theories assume an imperfect flow of information and knowledge, which in each of these theories is considered in a different context (Walter and Krenchel 2021). In many situations, information asymmetry is a roadblock to a mutually beneficial contract, because it leads either to fraud associated with moral hazard or to abandonment of a transaction by the party that feels misinformed.…”