Summary:
The bankruptcy system governs the rescue and orderly exit of market entities and constitutes an indispensable foundation for refining market mechanisms. For decades, China had in place only the Enterprise Bankruptcy Law, leaving personal bankruptcy system conspicuously absent. Consequently, “honest but unfortunate” individuals, burdened by overwhelming debts and financial distress, remained unable to resolve their difficulties through bankruptcy proceedings, thereby facing objective constraints on any attempt at a fresh start. This incomplete legal framework has been colloquially termed as “half-a-bankruptcy-law.” As China's development entered a new phase, the confluence of mounting, largely unrecoverable personal indebtedness and the long-standing absence of bankruptcy relief has placed significant strain on judicial capacity while simultaneously constraining the entrepreneurial re-entry of countless “honest but unfortunate” debtors. To address this, under the impetus of the central government, China initiated pilot reforms for personal bankruptcy across multiple regions starting in 2019. Personal bankruptcy refers to a legal framework where, upon an “honest debtor's” inability to repay maturing debts due to various reasons, judicial authorities intervene to exempt certain liabilities under specific conditions, facilitating bankruptcy liquidation, reorganization, or settlement. As a landmark reform in China's bankruptcy system development for the new era, the implementation of personal bankruptcy effectively alleviates the crushing burden on debtors by providing partial debt relief through legal procedures. While the protective benefits for debtors are evident, resolving debt issues inherently involves balancing the interests of both debtors and creditors. Thus, the impact on creditors warrants equal attention. Given China's bank-dominated financial system where banks act as primary creditors in personal bankruptcy proceedings, the promotion of personal bankruptcy inevitably influences bank credit behavior. On the one hand, from the perspective of market credit demand, personal bankruptcy enhances debtor protection and support. This may increase borrowers' risk-bearing capacity, encouraging them to leverage to undertake high-value, high-risk investments, thereby fostering a more lenient environment for innovation and entrepreneurship. Such activities inherently require substantial financial backing, potentially amplifying demand for bank loans among individuals. On the other hand, personal bankruptcy legally permits reasonable debt discharge, leading banks to anticipate lower recovery values on claims. This alters their risk perception, dampening credit extension willingness. Furthermore, the introduction of personal bankruptcy may heighten opportunistic behavior among borrowers, further increasing banks' lending risk and constraining their lending volumes. To resolve this theoretical divergence regarding personal bankruptcy's impact on bank credit behavior, this study employs a sample of local commercial banks from 2015-2022. By manually compiling data on regional personal bankruptcy pilot programs and utilizing bank-level data from CSMAR, Wind and CNRDS databases, we apply a multi-period DID approach to examine the system's effect on local bank credit supply. Results indicate that personal bankruptcy makes banks more conservative, reducing their willingness to grant credit. Following the pilot rollout, banks shift their portfolios toward mortgages, pledge loans, and short-term credit, and reduce unsecured loans, guarantee-backed loans, and medium-to-long-term loans, consequently impairing financing access for small-scale enterprises. Importantly, the study identifies mitigating measures: optimizing regional credit environments, developing the association of bankruptcy administrators, promoting online investigation and control systems, establishing government-court coordination mechanisms, and advancing bank digital transformation can effectively alleviate these adverse effects. This paper contributes in three dimensions: First, it enriches the economics literature on personal bankruptcy. At present, discussions on the personal bankruptcy system in China are still mainly confined to legal studies, while earlier studies in countries such as the United States center on household finance and entrepreneurship. Our findings broaden the understanding of the system's economic consequences and offer evidence from a transitional economy for law and economics research. Second, it deepens scholarly understanding of factors influencing bank credit behavior. While prior studies explore how creditor protection shapes credit allocation through legal channels, drawing on the legislative intent to protect “honest but unfortunate” debtors, we show that the introduction of personal bankruptcy reduces banks' credit supply, thereby offering new evidence on resource allocation in China's credit market. Finally, it provides policy-relevant guidance for realizing the system's intended benefits. As a nascent institution in China facing limited public understanding, this study finds that although the personal bankruptcy system protects debtors, it simultaneously dampens bank credit supply. However, optimizing regional credit environments, developing the association of bankruptcy administrators, promoting online investigation and control systems, establishing government-court coordination mechanisms, and advancing bank digital transformation can effectively alleviate these adverse effects. These conclusions offer valuable references for policymakers designing complementary mechanisms to optimize bankruptcy system reform. Economic research on China's personal bankruptcy system remains scarce. While achieving its core objective of debtor protection, the system simultaneously imposes heightened risk management demands on creditors. The impact of this institutional innovation will inevitably be multidimensional. Future research should delve deeper into micro-level impacts on individuals, investors, and enterprises, thereby enriching academic discussions and providing insights for fully leveraging the positive potential of personal bankruptcy in the new era.
纪翔阁, 潘越, 宁博, 宋金垚. 个人破产制度与信贷资源供给[J]. 金融研究, 2025, 541(7): 131-148.
JI Xiangge, PAN Yue, NING Bo, SONG Jinyao. Personal Bankruptcy System and Credit Resources Supply. Journal of Financial Research, 2025, 541(7): 131-148.
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