Bankruptcy regulations, policy credibility and asset transfers in Hungary

Apart from the normal, general tasks of bankruptcy, there are a number of special functions and tasks to be considered under the circumstances of transition. The introduction of bankruptcy must fit into a general sequence of institution building and economic policy. These aspects must be considered in the timing and design of a bankruptcy institution. When experts list the jolts undergone by the Hungarian economy in the early years of the transition, they frequently include the oft-mentioned demand shocks (collapse of markets, lifting of state protection, liberalization of markets, etc.) and some important institutional, ‘supply-side’ shocks. Some of these institutional shocks were as painful as the demand shocks, notably Hungary’s harsh bankruptcy law, which called for major managerial effort from debtors and creditors, while closely affecting much corporate activity. For instance, the creditworthiness of firms changed almost overnight.