Minus wastes economic resources diverts funds to

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Minus: wastes economic resources, diverts funds to hefty legal and consulting fees and slows down overall economic growth
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The companies that are filing for bankruptcy are benefitting because they have an easier time restructuring and can operate for longer while in debt. The economy loses out because a company operating in bankruptcy sometimes has an unfair advantage while the legal process gets drawn out. Lawyers also benefit from a drawn-out legal process 3. What are the pluses and minuses of a strong bankruptcy law? Who loses? Who benefits? Benefits: o Lenders, they will have resources if the company can’t pay back loans o Without bankruptcy laws lenders would be less likely to lend o The economy benefits because with stringent bankruptcy laws insufficient companies that don’t make profits or have structural problems will be shut down and liquidated Loses: o Companies, it’s unlikely they will recover and that they will then lose their assets o Liquidation- investors and workers o (if under bankruptcy laws you don’t even have to turn a profit) 4. What is the effect of a weak bankruptcy law on the availability of credit? Why? Creditors will be less likely to give out credit since, they are not as protected under weak bankruptcy law Companies who are efficient in the market and should be able to get credit will not be getting it if the bank doesn’t have the ability to recover from the loss in case of default 5. What form would you expect lending to take in a country with weak protection for creditors? Creditors in that country would likely stop lending Because of this I would expect foreign companies that have the capacity to, to come into the market where there would be no competition Also, foreign companies may not have to abide by the regulations and thus could apply more stringent bankruptcy laws to the debtor in this country D. Answer discussion questions 6 and 16 at the end of Chapter 14. 6. a. is this a good method for dealing with default? How does the answer depend on the riskiness of the loan?
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Overall yes, it will increase the incentives for the individual to pay or not receive credit if it knows that they are a “risky investment” If a loan is risky then this is a good way for dealing with default for the lender, not for the economy. The lender will not be approached to lend to any creditor who is risky, and this creditor will have incentives to pay back the loan and thus do their best to profit and make good decision. This isn’t good for the economy because if the creditor defaults, the debtor is left with no compensation b. How will reliance on this method affect the amount of lending that takes place? I would guess that less lending would take place Individuals would tend to rely more on savings instead of lending unless they are sure that they can return the debtor because of the risk that they could go to jail 16. 2 categories of borrowers: category 1- medium sized company, category 2- large creditworthy companies. Rule adopted because the lack of liquidity
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