Debt Enforcement around the World
Debt is one of the most useful contracts in every economy since it enables firms to finance investment and individuals to smooth consumption. But, like any other contract, debt needs to be enforced. To enforce debt contracts, societies create a variety of legal mechanisms or institutions that allow lenders to go after a defaulting borrower’s income and assets without resorting to violence. Some of the debt enforcement institutions, such as some foreclosure proceedings, do not require courts. However, in the case of firms with multiple creditors, many societies rely on courts to enforce debt contracts, usually through bankruptcy or insolvency procedures.
Despite the importance of debt enforcement, insolvency institutions are generally perceived to perform poorly, even in advanced market economies but especially in developing countries. This raises several questions: How poorly do these institutions function? Why do they function poorly? Are there ways to improve them? Are these reform strategies consistent with the other institutions and capabilities of a country?