Economic analysis is applied to bankruptcy law. Property right are reassigned in this court administered process and preexisting contracts only partially enforced. Bankruptcy's direct and indirect costs are examined. Simply stated, the dissertation concerns the estate's division among competing claimants, and how this process effects its size. It seeks to explain the typical outcome of deviations from the absolute priority rule (APR) whereas lower priority claimants, such as insolvent equity, retain value in reorganized firms while senior debts emerge impaired.;Deadweight losses and deviations from the APR are explained by equity's ownership of an implicit call option over firm assets. Equity rationally chooses real investments to maximize option value as opposed to the estate. This may entail selecting risky investments skewing the investment realization distribution during reorganization. The option is traded to creditors via the plan of reorganization. Agency costs result from inefficient real overinvestment as equity maximizes what is extracted from the estate and preexisting creditors. The legislatively mandated seniority of new interim loans over preexisting creditors exacerbates real overinvestment.;Legislatively imposed default rules form inalienable constraints preventing more efficient outcomes. Efforts claimed to "help" debtors ironically create a credit crunch. Bankruptcy law fosters transfer seeking by debtors, creditors, and lawyers, in a negative sum game. Contracting adapts around implicit convenants emplaced into debt contracts by bankruptcy, law, e.g. higher interest rates and loan qualification requirements, leasing as a substitute for secured debt. Property rights pending in the Bankruptcy Court system (1996) are approximately ;A chronological history of bankruptcy's statutory development is included. Coverage begins with Roman law, but focuses on legal transformations occurring in England and the United States. Most enactments occurred during severe economic downturns as politically endowed debtor to creditor transfers. Bankruptcy was diametrically transformed from a crime punishable by death into a debtor benefit. Repeatedly, benefits were broadened and eligibility widened.;Increasing benefits, the foremost being the ability to legally discharge debts without payment through the court procedure, stimulated usage. Annual filings increased six-fold since the 1978 Bankruptcy Reform Act with 1.18 million bankruptcies (1 per 86 households) during 1996, twenty times the rate during the Great Depression.
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