The Story Behind Bankruptcy: When Business Gets Personal
In a recent study, Dutch entrepreneurs who went through debt rescheduling after personal bankruptcy share their experiences to provide an understanding of the private, personal and social implications of bankruptcy.
The number of bankruptcies in a specific period, and levels of debt, are well documented but little is known about the consequences of bankruptcies beyond the numbers. In a recent study, written by myself and two colleagues, Dutch entrepreneurs who went through debt rescheduling after personal bankruptcy were interviewed in order to gain an understanding of the private, personal and social implications of bankruptcy. During the interviews, the entrepreneurs reflected on the early days of their business venture, the moment of first detecting the prospect of business failure, their personal experiences during business failure and the aftermath of bankruptcy and debt rescheduling.
The bankruptcy experiences of entrepreneurs illustrate that business failure is a phenomenon with profound personal and social consequences. The findings reveal multiple interlinked psychological, physical and social effects. The legal bankruptcy and debt rescheduling procedures, and their key representatives, such as the judge and bankruptcy trustee, play a surprising role in the processing of these consequences.
Ex-ante: In the run-up to a bankruptcy, entrepreneurs can lose their motivation; they don’t answer their emails, get behind on their administration, and generally just let things go. They are worried about what is going to happen, both for themselves and their families. This results in sleepless nights, making them emotionally unstable, tense and unpredictable, while at the same time, they are unable to rest. There is a continuous search for solutions, time and money. And, as the entrepreneur’s stress levels increase, the staff become increasingly demotivated, resulting in a downward spiral.
In Media Res: When personal bankruptcy is imposed by court order, a wide range of emotions can be observed. For one person, this can be resignation or relief, for another it is a truly bitter pill, and for yet another, bankruptcy can come totally out of the blue. For all the entrepreneurs, however, it can be associated with a deep sense of humiliation. It is a phase in which entrepreneurs become emotionally exhausted, and they and their partners suffer from psychological and physical problems. A frequently mentioned and related problem is that the settlement of the bankruptcy in the eyes of entrepreneurs takes far too long (for example, two and a half years). For a number of entrepreneurs, the demands of the debt rescheduling scheme at that time are also often too much.
Ex-post: A few months after their debt rescheduling ruling, the entrepreneurs settle down in somewhat quieter waters. In addition to frustration, fear and uncertainty about the future, there is an overriding sense of helplessness.
Effects of the Bankruptcy Experience
The findings uncover multiple interlinked psychological, physical and social effects. It is striking to see how severe the suffering — which included heart attacks, alcohol abuse, suicidal tendencies and divorce — was in each of these cases.
As a first key theme, and given that the psychological consequences are far-reaching — such as burn-out, anxiety, loss of self-esteem, depression, and not least, grief — the findings indicate that family and friends play an important role in how the bankruptcy experience and the mourning are processed emotionally.
The findings indicate that entrepreneurs feel insecure and anxious about the legal procedure because they often have no idea what their rights and obligations are. Because a personal bankruptcy and a debt rescheduling scheme for entrepreneurs are unfamiliar and complex processes, they are highly dependent on the resources in their immediate vicinity (i.e., legal aid or lawyers, bankers, accountants). If they cannot communicate well with these resources, they can easily fall into an ‘emotional pit’. When entrepreneurs gain more insights into their rights and obligations, or as one interviewee put it ‘if you have already been bankrupt once’, then they seem to know more about what to expect, and are no longer driven so much by these feelings of anxiety. However, communication is often far from perfect, and there is little or no direct contact. In some cases, entrepreneurs may have to deal with four or five different trustees, and contact often only occurs via email or the secretary.
A second key theme that emerges from the interview data is that entrepreneurs often have a need to be heard, and they do not understand why the legal process should be as devoid of emotion as it is. It feels like an ‘emotional punishment’, often because they are unable to let go of their business. It is comparable to losing a loved one; a psychological process similar to mourning. A lack of empathy, respect and transparency by the formal institutional representatives, such as judges, trustees and administrators, is an additional source of grievance. In their eyes, it is unfair and incomprehensible that the legal system only works for the creditors and not for them. Because of this perceived non-cooperative, emotion-free treatment, bankruptcy proceedings can be an extremely stressful grieving process, besides the emotions associated with business failure itself, contributing to the psychological and physical distress.
Discussion and implications
The interview data reveal two interrelated key themes. First, entrepreneurs who are in a debt rescheduling scheme after being declared bankrupt generally cannot personally let go of their demised business. They have a need to be heard, and cannot understand why the legal process is so devoid of emotion and so hostile to their personal interests. They feel this as ‘emotional punishment’, which hinders the way they cope with their loss. Secondly, support — in the form of family, friends, and business contacts — plays an important role in how a bankruptcy experience, debt rescheduling scheme and the mourning over the lost business are processed emotionally. In this context, it seems counter-productive that the legal system itself is perceived to impose a stigma on these entrepreneurs. Whether this perception results from the legal system imposing the stigma itself, or from entrepreneurs projecting onto this system their own sense of stigma — for example by projecting their own emotions onto the formal actors in the legal system — needs to be examined further.
Implications for Theory
This study found that the manner in which a trustee, judge or administrator treats an entrepreneur in a bankruptcy debt rescheduling scheme, can have severe negative emotional and motivational effects. In this way, the study connects insolvency law to the discussion of the role of emotion in law, particularly empathy. This area of research aims to shed light on the role of empathy in judging. The study thereby contributes to strengthening the ties between law and psychology in three ways. First, it is relevant to the theory of grief and recovery. We note that prior research primarily considers the informal social network in order to explain how entrepreneurs manage grief. The findings in this study suggest that, in a bankruptcy or debt rescheduling context, the role of a formal representative, in particular the trustee and administrator, may affect (i.e. moderate) the relationship between business failure and psychological symptoms, and thereby affect the speed of recovery. Second, the findings indicate that the formal role of a bankruptcy trustee (or judge), as well as (uncertainties about) the formal bankruptcy procedure, may affect emotional coping, and, subsequently, recovery. Third, the findings suggest that empathy — that is, responding with sensitivity and care to the suffering of an entrepreneur without breaching impartiality — deserves much greater research attention in bankruptcy law, as it may, for example, play a much greater role in the acceptance of a personal bankruptcy ruling, the mourning over the lost business and the subsequent second chance for entrepreneurs than is commonly acknowledged.
Implications for Practice
Discussions about the purpose of bankruptcy procedures have been (re-)opened in recent years, with much attention being paid to the early and cost-effective rescue of business. In an attempt ‘to avoid debt enforcement mechanisms that involve detailed and extensive court oversight’, preventive insolvency and out-of-court procedures are now considered a key European policy area to limit the economic and social effects of bankruptcy for entrepreneurs. The European Commission therefore, has recommended specialist judges and specialised training courses for formal representatives adjudicating in or administering the bankruptcy proceedings. Court-appointed trustees, whose salary is dependent on the estate’s funds, generally have multiple duties, including tracing fraudulent acts (e.g., actio pauliana), for which there are not always enough funds in the estate to cover for the time required. In this context, trustees tend to behave in a formalistic, efficient and distrustful, maybe even sceptical way. As a result, bankrupt entrepreneurs may feel like suspected criminals which exacerbates their problems. Although the current wave of bankruptcy reform seems to focus on a second chance (to restart following bankruptcy), or to turn struggling businesses around via workouts, this study suggests that debate is necessary on how to deal with the entrepreneur’s emotions throughout the legal procedure. That is, it should be discussed whether trustees, administrators and judges should respond with care and sensitivity to the suffering of entrepreneurs in a bankruptcy or debt rescheduling procedure, and if so, in what way and to what purpose. In general, it should be discussed whether society as a whole needs to pay attention to the psychological and social impact of distressed entrepreneurs. The study argues that a legal discussion on a ‘second chance’ cannot ignore how the legal process and its key representatives affect the psychological stress of failed entrepreneurs.