When talking about bankruptcy, most people relate it to the financial constraints suffered by individuals when they start the process. However, bankruptcy stigma goes beyond its original financial association, including also social and emotional factors.
The social stigma attached to bankruptcy represents the fear of how society views individuals who file for bankruptcy.[i] Since its origin, the term ‘bankruptcy’ has carried with it a heavy and badly meaning. Historically, not settling debts was seen as shameful to the community and, therefore, let individuals to be sanctioned and stigmatised. According to Ignatius, “individuals who became bankrupts have been treated harshly by society.”[ii] In Italy, merchants used to have their trading benches broken (therefore the term bankrupt) as a message to the community to avoid financial activity with those particular individuals.[iii]
At the end of the nineteenth century, most European countries shift their attitudes towards bankruptcy law, considering that punishing entrepreneurs for taking risks and excluding them from the market had negative effects on the economic system. As a result, “a new consciousness started to emerge, seeing bankruptcy procedure as the locus to fine tune the individual interests of debtors and creditors, with the social interest of keeping entrepreneurship and risk-taking alive.”[iv]
Even though governments around the world have adapted their bankruptcy procedures to enable entrepreneurs to have a “fresh start”, the social stigma very often prevents individuals to beneficiate from what the bankruptcy system has to offer.
The United Kingdom has the most uncomplicated path for bankruptcy compared to most of the other countries in the world. Bankruptcy can be seen as the fastest way of clearing unmanageable debt and allowing the debtor to have a fresh start. The system was modified in 2002 from a 3-year term to a 12-month term This was done because the UK wanted and needed to encourage business owners to be able to set up businesses again without long periods of restrictions.
[i] Haynes, D. Are You Avoiding Bankruptcy Because of Stigma?. the balance, 05 June 2020. <https://www.thebalance.com/bankruptcy-still-carries-stigmas-but-it-shouldn-t-316106#:~:text=The%20financial%20stigma%20associated%20with,score%20will%20usually%20go%20down.&text=The%20financial%20stigma%20may%20have,bankruptcy%20has%20wiped%20it%20out.>. Accessed 21 January 2021.
[ii] Ekanem, I. (2017). Understanding Bankruptcy: Global Issues, Perspectives and Challenges. Nova Science Publishers, Inc. 3.
[iii] Eklund, J. Levretto, N. Ramello, G. B. Entrepreneurship and failure: two sides of the same coin? Small Bus Econ (2020) 54:373–382. 375.
[iv] Eklund, J. Levretto, N. Ramello, G. B. Entrepreneurship and failure: two sides of the same coin? Small Bus Econ (2020) 54:373–382. 376.