Daniel sent us this one — he's asking how bankruptcy actually works around the world, specifically in the US and Israel, and what the real differences are when you dig into the mechanics. And I think the interesting thing here is that bankruptcy isn't one idea. It's a legal technology that different countries have engineered for completely different purposes. Some see it as a fresh start, some see it as a punishment for failure. Same word, radically different philosophy.
This matters right now more than most people realize. The Institute of International Finance reported global debt hit three hundred and fifteen trillion dollars in the first quarter of this year. That's a record. Cross-border insolvencies are rising. You've got remote workers with clients in three countries, freelancers with bank accounts in multiple jurisdictions, small businesses with international supply chains. If something goes wrong, which set of rules applies? The answer might determine whether you get a second chance or spend the next decade under a court-appointed supervisor.
Three hundred and fifteen trillion. That's a number so large it stops meaning anything.
It's about three hundred and thirty percent of global GDP.
That helps slightly. Though I have to ask — when we say cross-border insolvencies are rising, is that just a function of more global economic activity, or is something structural shifting?
The raw volume of cross-border commerce has grown, sure. But the nature of work has changed too. Fifteen years ago, the idea that a freelance graphic designer in Tel Aviv would have clients in Berlin, a bank account in New York, and an LLC registered in Delaware was unusual. Now it's Tuesday. And each of those jurisdictions has its own insolvency regime. They don't talk to each other automatically.
Let's start with the basics. What is bankruptcy, as a legal mechanism?
At its core, bankruptcy is a legal process for resolving insolvency — the inability to pay debts as they come due. Someone owes more than they can pay, and instead of a chaotic scramble where the fastest creditor grabs everything and everyone else gets nothing, the state steps in and imposes an orderly process. Think of it like a fire code for a crowded theater. Without it, when someone yells "fire," everyone crushes toward the exit and most people get trampled. Bankruptcy law says: everyone line up, we're going to do this in an orderly way, and some people might even get out with their coats.
That's a useful image. The fire code analogy makes it feel less abstract. But here's where it gets interesting. There are two fundamentally different answers to the question of what that orderly process should accomplish.
Sorry, I'm stealing your line setup. One camp says the goal is maximizing what creditors recover. You borrowed it, you pay it back, or as much of it as possible. Germany, Japan, and historically Israel fall into this camp. The other camp says no, the goal is giving the honest but unfortunate debtor a fresh start. Wipe the slate, let them re-enter the economy as a productive participant. That's the United States, the UK, Canada. And neither answer is obviously right — they reflect deep cultural and political values about risk, responsibility, and second chances.
The question underneath the question is, what's bankruptcy really about — forgiveness or punishment?
And every country's system is a specific answer to that tension. The US answers with what's arguably the most debtor-friendly system in the developed world. Let me walk through how it actually works, because the mechanics reveal the philosophy.
I've been meaning to understand why Americans can apparently just walk away from debt while the rest of the world watches in bewilderment.
The US system has two main tracks for individuals. Chapter Seven is liquidation. Chapter Thirteen is reorganization. And the philosophical engine driving both is something called the discharge — a court order that permanently wipes out personal liability for most debts. Once that order is entered, creditors are legally barred from ever trying to collect. No phone calls, no lawsuits, no garnishments. The debt simply ceases to exist as a legal obligation.
That is genuinely radical when you think about it. A judge can just declare that money you owe is no longer owed. I mean, in most areas of law, if you have a contractual obligation, the court's job is to enforce it. Bankruptcy court does the opposite — it extinguishes obligations. It's like a legal black hole for debt.
This traces back to eighteen ninety-eight, when Congress passed the first permanent federal bankruptcy law. The idea was that a functioning economy needs risk-takers, and risk-takers need to know that failure won't destroy them permanently. The nineteen seventy-eight Bankruptcy Code reinforced this dramatically — it created the modern Chapter Eleven for businesses and strengthened the discharge for individuals. Before that, the system was much more fragmented and much less generous.
Walk me through Chapter Seven. Someone's drowning in credit card debt. What actually happens?
The moment they file, something called the automatic stay kicks in. This is one of the most powerful legal mechanisms in American law. It instantly freezes all collection actions — foreclosures, repossessions, wage garnishments, lawsuits, even phone calls from debt collectors. I've talked to bankruptcy attorneys who describe it as flipping a switch. One day the phone is ringing off the hook with collection calls. The next day, silence. A bankruptcy trustee is appointed to take control of the filer's assets, sell off anything that isn't exempt, and distribute the proceeds to creditors.
What gets protected?
This is crucial because it's where most people's assumptions are wrong. Bankruptcy does not mean losing everything. The US has exemptions — property you get to keep no matter what. Federal law provides a set of exemptions, and many states offer their own, often more generous ones. A homestead exemption protects equity in your primary residence — in Texas and Florida, that exemption is unlimited, which is why wealthy people sometimes buy mansions in those states before filing. Retirement accounts are almost entirely protected. Tools of your trade, a vehicle up to a certain value, basic household goods. The average Chapter Seven filer in the US has about forty-five thousand dollars in unsecured debt and only about twenty-five hundred dollars in non-exempt assets. In practice, most Chapter Seven cases are what the courts call "no-asset" cases — there's nothing for the trustee to sell, and creditors get nothing.
The creditor just... They get a notice in the mail saying, "Sorry, there's nothing to distribute.
In most individual Chapter Seven cases, unsecured creditors recover zero. That's the tradeoff the system makes. But not all debts can be discharged. Student loans are almost impossible to wipe out — you need to prove "undue hardship," which courts interpret very narrowly. I should pause on this, because it's one of the most criticized features of the American system. The undue hardship standard comes from a case called Brunner, and it requires showing that you can't maintain a minimal standard of living, that this situation is likely to persist, and that you've made good faith efforts to repay. Courts have interpreted this so strictly that something like ninety-nine percent of student loan debtors who try to discharge their loans fail.
The fresh start has a massive asterisk for anyone with educational debt.
And recent tax debts, child support, alimony, and debts incurred through fraud are all non-dischargeable. And secured creditors — your mortgage lender, your car loan — they have a different position entirely. If you want to keep the house, you keep paying the mortgage. The discharge wipes out your personal liability, but the lien survives. Stop paying, and they can still foreclose. So the fresh start has boundaries. And what about Chapter Thirteen?
Chapter Thirteen is for people with regular income who want to keep their assets but need time to catch up. Instead of liquidating, you propose a repayment plan lasting three to five years. You make monthly payments to a trustee, who distributes them to creditors according to a statutory priority scheme. At the end, any remaining unsecured debt is discharged. The two thousand five BAPCPA reforms — the Bankruptcy Abuse Prevention and Consumer Protection Act — made this much more common.
That's the one that introduced means testing.
Before two thousand five, you could choose Chapter Seven or Chapter Thirteen pretty freely. BAPCPA added a means test that compares your income to the median for your state. If your income is above the median and you have enough disposable income to pay at least a portion of your debts, you're pushed into Chapter Thirteen. The formula is mechanical — it uses IRS expense allowances, not your actual spending. And it's been criticized for being both too rigid and too easy to game. But the effect was real: Chapter Thirteen filings jumped after two thousand five, and the system became more creditor-friendly at the margins.
How does the means test work in practice, though? If I'm a freelancer with irregular income, does it capture that?
The means test looks backward at your average income over the previous six months. If you had a great six months and then your biggest client disappeared, the test says you can afford a repayment plan that your actual current income can't support. This has been a persistent complaint from bankruptcy attorneys — the test is backward-looking in a way that doesn't match how income volatility actually works for gig workers and freelancers. You can file a motion to rebut the presumption, but that requires more legal fees, more court time, more complexity. The system was designed for people with W-2 jobs and predictable paychecks.
I want to dig into business bankruptcies, because that's where things get strange.
Chapter Eleven is the American system's crown jewel and its biggest export. The idea is that a business might be worth more alive than dead — as a going concern, it generates value that liquidation would destroy. Think of it like a car that won't start. You could sell it for scrap and get a few hundred dollars for the metal. Or you could fix the engine and have a functioning vehicle worth thousands. Chapter Eleven is the mechanic's bay. So instead of selling off the assets, you restructure the debt. The existing management typically stays in place as what's called a debtor in possession. They get an exclusive period to propose a reorganization plan. Creditors are divided into classes — secured, unsecured, equity holders — and each class votes on the plan.
The absolute priority rule.
The absolute priority rule says that a dissenting class of creditors has to be paid in full before any junior class gets anything. In theory, this means equity holders — shareholders — get wiped out in most Chapter Elevens, because there's rarely enough value to pay all creditors in full. In practice, it's more complicated. The twenty twenty-four Purdue Pharma settlement structure was a landmark example — the Supreme Court actually struck down a provision that would have shielded the Sackler family from future lawsuits without their consent. But the broader point stands: Chapter Eleven is a negotiation framework as much as a legal process. It's a structured bargaining environment where the threat of liquidation hangs over everyone's head.
Debtor-in-possession financing is the key that makes it all work.
A company in Chapter Eleven needs cash to keep operating — paying employees, buying inventory, keeping the lights on. But who lends to a bankrupt company? The answer is that DIP lenders get super-priority status — they jump to the front of the repayment line, ahead of every existing creditor. This makes it a surprisingly safe and profitable form of lending. When Rite Aid filed for Chapter Eleven in twenty twenty-four with three point six billion dollars in debt, DIP financing kept hundreds of stores open during the restructuring. Without it, the whole thing collapses into liquidation. The DIP lenders know they're getting paid first, so they're willing to extend credit that no one else would touch.
That's the American approach — a system explicitly designed to give people and businesses a second chance. Now let's cross the Atlantic, or more precisely the Mediterranean, and look at a completely different legal tradition.
Israel's bankruptcy system is fascinating because it underwent a radical transformation in twenty eighteen. Before that, the system was governed by a nineteen eighty Bankruptcy Ordinance that was essentially a British colonial relic. It was punitive. It treated bankruptcy as a moral failing. Creditors had enormous power, debtors had few protections, and the stigma was so intense that many people simply never filed — they lived in a shadow economy of informal debt arrangements and constant collection pressure. I spoke to an Israeli attorney who described the pre-reform system as "a machine for keeping people poor forever." You could be under supervision for nine years, your travel restricted, your professional licenses revoked. It was designed to make bankruptcy so unpleasant that only the truly desperate would attempt it.
Then the twenty eighteen Insolvency and Economic Rehabilitation Law changed everything.
It really did. The new law shifted the entire philosophical framework from creditor recovery to debtor rehabilitation. The maximum discharge period dropped from nine years to six. A dedicated Insolvency Commissioner's office was created — the Israeli equivalent of the US Trustee program, but more centralized. And for the first time, individual debtors got a clear path to a fresh start that didn't require groveling. The law explicitly states that its purpose is rehabilitation, not punishment. That was a genuine philosophical break with the past.
Walk me through the Israeli process for an individual. What does someone actually experience?
The central mechanism is something called a hesder chov — a debt arrangement. The debtor petitions the court, and an official receiver — a government appointee — is assigned to supervise the case. This is a key difference from the US. In America, the trustee is a private individual appointed from a panel. In Israel, the official receiver is a state employee who works for the Insolvency Commissioner. The state is in your financial life.
That feels like a meaningful distinction. The American system outsources supervision to private trustees. Israel keeps it in-house. What are the practical consequences of that?
It shapes everything. The official receiver has broad investigative powers. They can examine your bank records, interview your family members, restrict your travel. For the first year after filing, you're under what's essentially financial supervision — you need permission for certain transactions, you can't be a company director, your credit is frozen. After that, if you're on the rehabilitation track, you enter a payment plan that can last up to six years. You're required to complete financial counseling. You have to demonstrate good faith throughout. Only then does the court issue a discharge.
Six years versus four to six months for a US Chapter Seven. That is not a small difference.
The automatic stay in Israel is weaker. In the US, filing triggers an immediate, comprehensive freeze on all collection actions — it's automatic, it's broad, and violating it can get a creditor sanctioned. In Israel, secured creditors can still petition the court for permission to enforce their liens. There's no equivalent to the debtor-in-possession model for small businesses. If you own a small company and you're insolvent, you're probably losing control. The system doesn't have the same "keep the business alive" presumption that Chapter Eleven provides.
Even after the twenty eighteen reforms, Israel is still meaningfully less debtor-friendly than the United States.
And the cultural dimension can't be overstated. Jewish law — Halacha — has complex provisions about debt forgiveness. The shmita year, every seventh year, mandates cancellation of debts. But the ancient rabbis recognized that this would destroy lending markets, so they created the prosbul — a legal mechanism that allows debts to survive the shmita year by transferring them to the court. That tension between forgiveness and practicality is baked into Jewish legal thinking for two thousand years. You can see it in the Talmudic debates: on the one hand, debt forgiveness is a moral imperative. On the other hand, if no one will lend, the poor suffer too. The rabbis were grappling with the exact same policy tension that modern bankruptcy legislators face.
That's a fun fact hiding in plain sight. The prosbul was essentially a two-thousand-year-old workaround to prevent a credit freeze.
And the stigma is still intense. Israel sees about thirty-five hundred individual bankruptcy filings per year. The United States, with roughly forty times the population, sees about four hundred thousand — but per capita, that means Americans file at about three times the rate of Israelis. And that's after the twenty eighteen reforms made filing easier. The cultural resistance to declaring bankruptcy is deep. It's seen as shameful in a way that American culture has largely moved past.
"I filed for bankruptcy" in America can be almost a strategic flex. In Israel, it's a confession.
This connects to something we've talked about before — the unique risks Israeli households face. Israeli mortgages are often CPI-linked, with variable rates and negative amortization features. If inflation spikes, your mortgage payment spikes with it, and your principal can actually grow. Israeli freelancers deal with a social safety net that treats them as second-class citizens compared to salaried employees. So you have a population that's structurally more exposed to insolvency risk, but culturally and legally less able to access the fresh-start mechanism.
You've got higher risk and a harder escape route. That's a bad combination. What does that actually look like on the ground? Are there Israeli households right now with CPI-linked mortgages watching their payments climb while their income stays flat?
When inflation ticked up in Israel in twenty twenty-two and twenty twenty-three, mortgage payments for CPI-linked borrowers rose in lockstep. Your salary doesn't automatically adjust to inflation, but your mortgage does. In the US, most mortgages are fixed-rate — your payment stays the same for thirty years regardless of what inflation does. That's a massive structural protection that Israeli homeowners simply don't have. And it means that an external economic shock — something completely outside your control — can push a family from "managing" to "insolvent" without them doing anything differently.
It gets worse when you add the cross-border dimension. Let me give you a concrete case. In twenty twenty-four, an Israeli fintech company called Balance — US venture capital backed, but with Israeli operations — went bankrupt. The US investors tried to get Chapter Fifteen recognition in the American courts. Chapter Fifteen is the US implementation of the UNCITRAL Model Law on Cross-Border Insolvency. It allows a foreign insolvency proceeding to be recognized in the US, which gives the foreign representative access to American courts and protects US assets from piecemeal seizure.
Israel hasn't adopted the Model Law.
Israel has not adopted it. So the US court denied Chapter Fifteen recognition, because Israel isn't a Model Law jurisdiction. The result was chaos — American assets subject to one set of rules, Israeli assets subject to another, creditors in different countries racing to grab what they could. The Model Law has been adopted by fifty-two countries as of May twenty twenty-six. Israel is not among them. Neither is China. Neither is Russia. It's a club of countries that have agreed to coordinate, and if your country isn't in the club, cross-border insolvencies become a free-for-all.
Fifty-two countries. And Chapter Fifteen filings in the US hit twelve hundred forty-seven in twenty twenty-five, up twenty-two percent from the previous year.
Driven heavily by cross-border crypto exchange collapses. When a crypto exchange goes under, its assets and creditors are scattered across dozens of jurisdictions. Without the Model Law framework, each country's courts handle their own piece, and the results are inconsistent, expensive, and slow. You literally have judges in different countries making contradictory rulings about who owns what.
If you're a freelancer with a US bank account, an Israeli bank account, and clients in three countries — which set of rules governs your bankruptcy?
That's the nightmare scenario. In theory, your "center of main interests" — your COMI — determines which country's courts have primary jurisdiction. In practice, COMI is notoriously hard to pin down for remote workers and digital nomads. You might think you're filing in Israel, but a US creditor could argue your COMI is actually in Delaware because that's where your LLC is registered. And then you're litigating jurisdiction before you even get to the merits. I've seen cases where the jurisdiction fight alone cost more than the debts at issue.
That seems like a design flaw. The concept of COMI was developed for companies with physical headquarters and clear operational centers. It wasn't built for someone working from a laptop in a co-working space in Tel Aviv with a Stripe account linked to a US entity.
COMI was developed in an era when "where do you do business" had an obvious physical answer. Now it's a legal Rorschach test. And courts in different countries have applied different tests — some look at where your bank accounts are, some look at where your clients are, some look at where you pay taxes. There's no global standard.
Let's make this practical. What should someone actually do if they have cross-border exposure?
First, check whether your country has adopted the UNCITRAL Model Law. If you're in Israel, the answer is no, and you need to plan accordingly. US bankruptcy exemptions don't protect Israeli bank accounts. An Israeli discharge might not be recognized in the US. If you have significant assets or debts in multiple countries, pre-bankruptcy planning has to account for each jurisdiction's rules separately.
Pre-bankruptcy planning. That sounds like something that should not be necessary but absolutely is.
It's essential. And the trend lines are actually moving in a coherent direction. The twenty eighteen Israeli reform shifted toward rehabilitation. The twenty nineteen EU Restructuring Directive did the same thing — it required all EU member states to create preventive restructuring frameworks that give viable businesses a chance to reorganize before they're insolvent. The philosophical center of gravity is moving away from "punish the debtor" and toward "save what can be saved." But enforcement mechanisms still vary wildly. Knowing your home court advantage matters enormously.
Home court advantage in bankruptcy court. The legal equivalent of building your house on the high ground. And if you're a freelancer or remote worker with international clients, you should be thinking about this now, not when something goes wrong. Where would you file? What exemptions would apply? Would your discharge be recognized where your creditors are? These are questions with real financial consequences, and most people don't ask them until it's too late.
There's one misconception I want to address directly, because it keeps coming up. The idea that bankruptcy is only for irresponsible people — people who racked up credit cards on vacations and luxury goods.
The data completely contradicts this. A twenty twenty-five study in the American Journal of Public Health found that sixty-six percent of US bankruptcy filings cite medical issues as a primary cause. People who got sick or injured and couldn't work, or whose insurance didn't cover enough, or who hit a coverage gap. I remember one case from the study — a woman in Ohio who had health insurance through her employer, got diagnosed with cancer, and still ended up with over a hundred thousand dollars in out-of-pocket costs because of deductibles and out-of-network charges. She filed for bankruptcy not because she was irresponsible, but because the American healthcare system has gaps large enough to drive a truck through.
The second biggest driver is business failure — people who took a risk on a small business and it didn't work out. The stereotype of the irresponsible spendthrift is mostly a myth. It's a comforting story we tell ourselves to believe that bankruptcy only happens to people who deserve it.
Because bankruptcy laws encode a society's moral judgments about debt. The American view — enshrined in the Constitution itself, which gives Congress the power to establish "uniform laws on the subject of bankruptcies" — is that entrepreneurship requires a safety net, and that safety net includes the right to fail. Other legal traditions see debt as a moral obligation that survives financial misfortune. Neither view is objectively correct. They're choices. And they have consequences for real people who didn't choose to get sick or have their business fail during a pandemic.
Where is all this heading? We've got AI-driven credit scoring becoming more sophisticated. We've got decentralized finance — DeFi — creating lending relationships that exist entirely outside traditional legal frameworks. Smart contracts that automatically liquidate collateral when certain conditions are met, with no court involved at all.
This is the open question that keeps me up. If your debts are encoded in smart contracts on a blockchain, and the contract automatically seizes your collateral when you miss a payment, what role does bankruptcy law even play? You can't discharge a smart contract. You can't negotiate with code. You can't ask a smart contract for a hardship extension. The entire bankruptcy framework assumes there's a court that can issue orders and a creditor who can be bound by them. DeFi lending creates obligations that are, by design, beyond the reach of any court.
We might be building a parallel financial system that makes bankruptcy obsolete — not by solving insolvency, but by making it irreversible. The smart contract doesn't care that you lost your job. It doesn't care that the collateral dropped in value because of a market flash crash. It just executes.
Or we might see the emergence of new forms of insolvency that existing laws literally cannot handle. Imagine a DAO — a decentralized autonomous organization — that becomes insolvent. Who files for bankruptcy? The DAO isn't a legal entity in most jurisdictions. Its creditors are pseudonymous wallet addresses scattered across the globe. Its assets are in liquidity pools governed by smart contracts. There's no one to put on the stand, no assets to freeze, no court with clear jurisdiction. The legal system simply doesn't have categories for this yet. We're trying to apply nineteenth-century legal concepts to twenty-first-century financial structures.
The EU is trying to get ahead of at least some of this. The twenty twenty-five draft directive on harmonizing insolvency laws.
The European Commission proposed a directive that would create a minimum standard for preventive restructuring frameworks across all member states. It's not full harmonization — each country would still have its own system — but it would establish a floor. Certain basic protections would exist everywhere. The goal is to reduce forum shopping — the practice of moving your assets or your corporate headquarters to the country with the most favorable bankruptcy laws before filing.
The bankruptcy version of picking your battlefield. And it's been a huge issue in the EU. A company incorporated in one country, with operations in another, and assets in a third, could choose to file in whichever jurisdiction gave management the best chance of staying in control. The draft directive tries to close that gap.
It doesn't touch DeFi. It doesn't touch DAOs. It's an important step, but it's solving a twentieth-century problem while the twenty-first-century problems are piling up unaddressed. The pace of legal reform is measured in decades. The pace of financial innovation is measured in months.
To bring this back to the individual listener — someone who's not running a multinational corporation but might have a freelance client in Berlin and a bank account in Tel Aviv — what's the single most important thing to understand?
That bankruptcy is territorial. Your fresh start in one country doesn't automatically follow you to another. If you're going to have cross-border financial exposure, you need to understand which jurisdiction's rules will actually govern if something goes wrong. Check whether your country has adopted the UNCITRAL Model Law. Talk to a lawyer who understands cross-border insolvency before there's a problem. The time to learn the escape routes is not when the building is on fire.
The broader takeaway — the thing I find interesting — is that bankruptcy law is a window into what a society actually believes about failure. The US says failure is a feature of a dynamic economy. Israel, even after reform, still treats it as something closer to a moral lapse. Neither is fully right or fully wrong, but the consequences for real people are enormous.
Four to six months versus six years. A private trustee versus a government official receiver. A culture that says "what's your next venture" versus a culture that says "what will the neighbors think." These differences aren't just legal technicalities. They shape who takes risks, who starts businesses, who gets second chances, and who spends a decade under financial supervision for the crime of things not working out. And as the global economy becomes more interconnected, those differences are going to collide more often — and the people caught in the collision won't be multinational corporations with legal teams. They'll be freelancers and small business owners who never imagined they'd need to understand cross-border insolvency law.
Now: Hilbert's daily fun fact.
Hilbert: In the nineteen fifties, a Soviet herpetologist in Turkmenistan recorded the largest known platypus specimen ever observed outside Australia — a male measuring sixty-two centimeters from bill to tail and weighing three point one kilograms, which is roughly thirty percent larger than the typical male platypus. It was living in a specially heated enclosure at a research station near Ashgabat, part of a failed Soviet experiment to determine whether monotremes could be acclimatized to Central Asian waterways for fur production.
...right.
Soviet platypus fur farming. That's a sentence I just heard. I have so many follow-up questions I'm not going to ask.
This has been My Weird Prompts. Thanks to our producer Hilbert Flumingtop. If you enjoyed this episode, leave us a review wherever you listen — it helps more people find the show. I'm Corn.
I'm Herman Poppleberry. Go look up whether your country adopted the Model Law.
It's probably not the bedtime reading you wanted, but it's the bedtime reading you need.
