Business Failures and Bankruptcy Administration

January 19, 1931

Report Outline
Evolution of American Bankruptcy System
Current Criticisms of Bankruptcy Administration
Business Failures and Bankruptcy Litigation
Official Investigations of Business Failures and Bankruptcy Administration
Special Focus

The federal bankruptcy law of 1898, by which as amended bankruptcy procedure throughout the United States is regulated, is under heavy fire from many quarters. Associations of credit men, practitioners in bankruptcy, judges of federal courts, bar associations, and professors of law are dissatisfied with the act and its administration. They point to long delays in bankruptcy proceedings, to the small return to creditors after adjudication of insolvent estates, and to the high cost of administration. They deplore the “breakdown” of the theory of creditor control of bankrupt estates, the apparent ease with which debtors may be discharged from their debts, and the lack of professional ethics upon the part of many lawyers practicing in bankruptcy. In response to these criticisms more than a score of measures have been introduced in the present Congress to amend the federal bankruptcy act and to investigate alleged abuses in proceedings under it.

Rise in Commercial Failures During 1930

Meanwhile, the alarming rise in commercial failures, both before and during the current business depression, has stimulated official investigation of their causes. According to Dun's Review there were 26,355 failures in 1930 compared with 22,909 in 1929—an increase of 15 per cent. Liabilities of the insolvent concerns totaled $483,250,196 in 1929 and $668,283,842 in 1930—an increase of nearly 40 per cent.

The rapid growth of the losses involved in commercial failures has led the Department of Commerce to institute a series of studies of credit extension and the causes of failure among different types of business in various cities with a view to their prevention. The Department of Justice at the same time has undertaken an inquiry into the administration of insolvent estates after they get into the bankruptcy courts as well as an inquiry into ways and means of diminishing the losses which occur after insolvency but before the institution of formal bankruptcy proceedings. With the coöperation of five leading business men's organizations, the department is conducting a nation-wide investigation of the alleged defects in the act of 1898 and in its administration, with a view to the elimination of weaknesses in the law and abuses in its operation. This inquiry, which is being made at the direction of President Hoover, is a direct outgrowth of the inquiry into the administration of bankrupts' estates in the southern district of New York conducted during 1929–30 by William J. Donovan as counsel for three New York City bar associations before Thomas D. Thacher, then judge of the United States court in that district and now Solicitor General of the United States.

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