The Latest American Export: Bankruptcy Laws

Transcript

AUDIE CORNISH, HOST:

Ireland, France and Germany are just a few of the countries that have recently adopted a very American tradition - bankruptcy, specifically Chapter 11, where a company that can't pay its bills doesn't have to go out of business. It can find a way to renegotiate its debts and keep going. Stacey Vanek Smith from our PLANET MONEY podcast says this is an American invention.

STACEY VANEK SMITH, BYLINE: For most people, bankruptcy is something they never want to think about. David Skeel is not one of those people.

DAVID SKEEL: I have been studying bankruptcy about 30 years since I just fell in love. I fell in love.

SMITH: Skeel teaches bankruptcy law and the University of Pennsylvania. He says our bankruptcy laws go way back to the 1800s.

SKEEL: The first giant corporations in America were the railroads.

SMITH: The railroads were constantly borrowing money and going bankrupt.

SKEEL: At one point in the late-19th century, almost 20 percent of all of the railroad track in the country had failed.

SMITH: If you'd lent money to a railroad, this was a big problem. Sure, you could seize a section of track in the middle of Nebraska, but nobody wanted that. What you really wanted was for this bankrupt railroad to somehow keep running so it would have a chance of actually paying you back. So Skeel says a remarkable thing happened. Railroad companies, debt collectors and lawyers got together and wrote a law.

SKEEL: That was unprecedented in world history. No other country had had a system like this that was designed not to shut down substantial businesses when they failed, but to reorganize them, to give them another chance.

SMITH: So what did the world think of this new kind of bankruptcy?

SKEEL: Well, they thought we were crazy, as they often do.

SMITH: And you can see why. If you let a company that goes bankrupt just wave its debts away and keep going, why wouldn't companies just borrow lots of money and take crazy irresponsible risks? But in the U.S., we decided we'd rather have a system that encourages companies to take risks. And if they fail, we have a way for them to pick up the pieces.

During the last recession, hundreds of thousands of companies went bankrupt in the U.S. One of them was Queen City Appliances in Charlotte, N.C. Roddey Player owns the company. He says filing for bankruptcy was awful, but it did give him a moment to get things organized and come up with a plan.

RODDEY PLAYER: You can take a breath without all the emotion, without the dark clouds over you, saying, well, here's what we can do going forward.

SMITH: Under Chapter 11, Player had to shut down a lot of his stores, lay off a lot of his workers and come up with a business plan that all of the people he owed money to would agree on. But a year and a half later, his company was out of bankruptcy, selling refrigerators and mattresses again, turning a profit. David Skeel, the bankruptcy professor, says this story happened over and over during the recession, and it's one of the reasons the U.S. economy recovered faster than some others.

SKEEL: As tough as the last few years have been, the American economy has responded a little bit more effectively than other economies, and bankruptcy is a part of that.

SMITH: Bankruptcy - it's one of the things we do best. Stacey Vanek Smith, NPR News. Transcript provided by NPR, Copyright NPR.