The Comparative Status of Secured Creditors in the Bankruptcy Procedure and Its Implication for the Financial Transaction

Abstract

Official declarations of bankruptcy have and had different meaning and stigma in ountries.

A decade after the economic upheaval witnessed dramatic changes of scenes surrounding

bankruptcy in Korea. The petition of total bankruptcy procedure climbed from 79 in 1996 to 180,055 cases in 2006. All of these turbulent reformation and virtual rebirth of bankruptcy in Korea fall short in one area. These changes do not stir secured creditors status in bankruptcy procedures. Compared to U.S., secured creditors in Korea enjoy very strong legal protection even after the debtors insolvency realizes. This article will survey the Korea and U.S. law governing

secured creditors under bankruptcy procedure and suggests that these relative differences of legal treatment of secured creditors have enormous impacts on the financial transactions beyond bankruptcy itself, specifically consumer and commercial loan practices. While scholars of law and economics suggest that surviving legal system may be the most efficient ones to reflect articular social demand and incorporate practices of private parties, but the legal procedure and allocation of powers in it determines and entrenches the formation and terms of market transactions though it is not the most efficient practices. This article suggests that the status of secured creditors in bankruptcy influences beyond the bankruptcy itself and affects the incentives of financial transaction and costs. Though comparative lens between U.S. and Korea, this article details that the comparative difference of status of secured creditors under bankruptcy between Korea and U.S. and that roots of this divergence has related to financial market. While some development in

Koreas financial market will provide room for further reform to maneuver the pre-bankruptcy entitlement, the differed role of bankruptcy in secured transaction as an entrenched aspect in market will survive any reform and affect the financial transaction and corporate investment decision eciprocally