4. The Impacts of Bankruptcy
The aim of bankruptcy administration is to provide a procedure for realising the debtor's assets and equitably distributing the debtor's property to creditors. An issue that arises constantly is the lack of assets available for distribution to creditors. Personal insolvency legislation is therefore a balancing act between the rights of the various groups of creditors and the debtor.
However, the impacts of insolvency extend further than the creditors and the debtor of any particular insolvency proceeding. They include insolvent debtors, solvent debtors, creditors involved in insolvency proceedings, creditors, the wider community and Government. The market's behaviour in response to the insolvency regime has significant impacts on these stakeholders.
4.1 Cost and Availability of Credit
Bankruptcy administration procedure affects the cost and availability of credit within the economy. If the bankruptcy process does not focus on returning the assets to creditors, the security of payment for creditors will be diminished. As the cost of credit increases, fewer business projects will secure finance. This will place at risk income and jobs. Further, fewer consumers will be able to either access credit or access credit at reasonable rates.
An administration procedure may also increase the cost of credit if it adds to uncertainty by, for example, making it unclear what a creditor's rights will be if a debtor becomes insolvent.
4.2 Harsh Costs to Debtors
It is important that the bankrupt be able to retain a certain level of assets and income over the period of the bankruptcy. Assets, such as tools of trade, may provide an opportunity for the bankrupt to resume earning an income sufficient, for example, to repay at least a portion of the outstanding debts. An income and other assets may also be necessary to ensure at least an adequate standard of living for the debtor.
4.3 Efficient Use of Resources
For an economy to maximise opportunities for growth, it is important that investment resources are used to best effect. Business failure wastes investment resources. A bankruptcy administration regime that penalises bankrupts who have acted imprudently is likely to encourage sound investment decisions, and reduce the incidence of bankruptcy. Similarly, a regime that allows bankrupts to again enter business allows for those bankrupts to again contribute in a positive way to the economy.
4.4 Administration Costs
The administration costs of bankruptcy are the costs the Government incurs in developing, implementing, enforcing, monitoring and reviewing the regime. Ultimately the costs fall on taxpayers. The more significant the changes to the existing regime, for example, the higher the short-term administration costs are likely to be (although this may be more than balanced by long-term savings).
4.5 Transaction Costs
The transaction costs to debtors and creditors when bankruptcy occurs are the costs they incur in transacting with non-Government entities and individuals. Changes to the bankruptcy regime that detract from certainty may, for example, lead to creditors incurring higher costs in screening potential debtors and subsequently monitoring debtor behaviour.
4.6 Compliance Costs
Compliance costs are the costs debtors and creditors incur in interacting with Government to comply with the regime's requirements. The more cumbersome and complicated the bankruptcy regime, the greater the likely costs to creditors and debtors in complying with that regime.
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