Spain and The USA. A Bankruptcy comparison

Abstract

[EN] The current economic global situation has affected different countries in several ways, many of which resulting in the bankruptcy of numerous companies and individuals. There are numerous differences between countries in terms of demographics and the economic situation in relation to the number of bankruptcy filings and proceedings. The bankruptcy law in Spain has been proved to be very inefficient. So far the solutions applied under the bankruptcy law have mainly resulted in liquidation process and a reform for it was approved on the 22nd of September 2011. The goal of this project is to make a comparison of the bankruptcy process between the situation in Spain and the United States of America. In 2001 the world experienced the Internet bubble explosion and together with the decrease of borrowing costs from 6.5% to 1% by the U.S. Federal Reserve it resulted in the growth of the real estate market and the prices of houses in the U.S. were doubled in 10 years. Furthermore, interest rates prevailing in international financial markets had been very low which lead to banks in the U.S. to grant riskier loans and compensate low margins by increasing the number of operations. In order to obtain riskier loans they started to give mortgage loans to “NINJA clients” (“No Income, No Job or Assets”). The goal with these loans was to charge higher interests due to the risk supported. They were called “Subprime Mortgages” also known as “NINJA Loans” now. Additionally, many of these loans were packed and sold to other lenders and ended up in investors as “Collateralized Debt Obligations” (CDO). The problem was that from the beginning the loans were given without ensuring that the applicant could afford the mortgage and CDOs were seen as relatively safe investments, since they were secured by real property. In 2007, prices of U.S. homes plummeted and most of the NINJAS were unable to continue paying their mortgages. This is when what was thought to be a recession became a global financial crisis and a major issue nowadays. World stock markets have fallen, large financial institutions collapsed or have been bought out, and even governments in the wealthiest countries have had to come up with rescue packages to save their financial systems. This situation along with the closure of many companies has developed the rise of unemployment which made people and companies unable to meet their credit card payments. One of the main reasons for the closure of most companies was the lack of credit due to banks having no liquidity and hence being unable to grant credits to companies because of the situation described earlier. This meant that companies could not even finance their working capital and started to look at bankruptcy as a solution.

Bankruptcies amongst countries have different spectrum of debtor-oriented and creditor-oriented procedures. In addition, there are two alternative corporate bankruptcy procedures in practice, these are liquidation and reorganization. In a liquidation case the firm’s assets are sold, the liabilities discharged as far as possible, and the enterprise is terminated. In a reorganization case whether voluntary or court-imposed the capital suppliers recognize losses, and typically exchange their claims for new ones of a reduced amount. A successful bankruptcy procedure acts as a filtering mechanism by providing the opportunity for inefficient firms to be liquidated as well as providing an opportunity for viable firms to be reorganized. The U.S. public corporations have a larger share of reorganization in bankruptcy proceedings for corporate companies than European countries and the procedure is debtor-friendly in contrast with other countries. This statement will be addressed later on in the paper using the necessary evidence. However, more important than the harshness or gentleness of legal codes towards debtors is the efficiency and frequency of bankruptcy procedures. In terms of frequency, a country has too many bankruptcies, with economic losses for the society as a consequence, if companies that contribute positively are shut down. On the other hand, a country has too few bankruptcies, with economic costs for the society as a consequent, if inefficient firms continue to live and waste resources for long. Furthermore, the efficient frequency of bankruptcy can vary between countries for reasons such as difference in economic and legislative structures. This paper will proceed to analyze and compare the economic background of the countries under discussion as well as their current bankruptcy situation. It will then go on to analyzing the bankruptcy system and compare it in both countries. The comparison will include a theoretical analysis of both legislations and will conclude with a practical case in the countries studied to better understand and identify the differences amongst them.