Chapter 11-style bankruptcy protection would hurt the economy

By Eamonn Butler (July 16 2008)

Cameron's "Chapter 11" idea seems to have come from a list of weekly headline-grabbers rather than through a long think-tanking process.

Still, with the UK economy heading south, its timing is perfect.

The idea of Chapter 11, which refers to a section of the United States Bankruptcy Code, is that individuals and firms can stave off bankruptcy and keep control of their assets while they reorganise themselves out. Individuals must agree to debt counselling and a repayment schedule. Businesses have to state all their financial information and file a recovery plan.

Does it work? Well, some of the highest-profile Chapter 11 beneficiaries have been America's airlines, including Northwest and Delta (which went on to merge), ATA (which eventually failed), US Airways (limping along) and United (still in huge debt).

It might have prevented the sudden shock of bankruptcy, but what eventually happened is probably what would have happened anyway. And America's airlines still look bloated.

Compare that with the UK, where the threat of failure is much more acute, and where competitive, cost-conscious airlines like Easyjet and Ryanair are setting the pace.

But the real problem with the UK's bankruptcy regime is not this. It's the fact that HM Revenue & Customs are first in the queue to be paid when a business fails. Not surprisingly, the biggest filer of bankruptcy petitions is HM Revenue & Customs.

But the real problem with the UK's bankruptcy regime is not this. It's local authorities who willingly bankrupt people unable to pay a £1200 Council Tax bill, and HM Revenue & Customs, who have every incentive to force small traders out of business and pocket a fat bonus for the tax they recover, rather than working to help them through difficult times.

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