F. Effect of Inability to File for Bankruptcy

The inability to file for bankruptcy negatively affects Indian tribes in two ways. First, it is more difficult for a struggling business to survive. Second, it is more difficult to obtain initial financing to start a business.

One of the purposes of the bankruptcy system is to restructure a business's finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for its stockholders. If reorganization is impossible, it is more likely that a struggling business will go under, harming not only the business owner, but also the community that relies on the business. The community effect is amplified in Indian communities because of tribes' reliance on Indian enterprises for economic development. Exclusion from the bankruptcy system deprives Indian tribes of a benefit that they particularly need.

When creditors and insurers are uncertain of their protections under the Bankruptcy Code, they are reluctant to provide financing. Unsurprisingly, then, because the bankruptcy system is not available to Indian tribes, initial financing is difficult to obtain because of the perceived instability of dealing with Indian tribes and the lack of an institutional environment where investors feel secure. In other lending contexts, creditors can rely on an established institutional environment if a borrower becomes insolvent, but in the context of tribal dealings, creditors have no recourse to the bankruptcy system.

Furthermore, receipt of initial financing and the ability to restructure a failing business are closely linked. When a business is struggling, it will either fail or restructure. If the former occurs, then the business will default on its loans and creditors will only receive assets currently on hand through liquidation. Restructuring, however, provides the creditor with the opportunity to recoup a greater portion of its investment. In fact, one requirement of Chapter 11 is that creditors cannot receive less than they would in a liquidation. The ability to restructure can only improve, not harm, the position of creditors.

Additional features of the bankruptcy system that offer protections in the case of a default may increase a lender's willingness to make loans. For example, in a bankruptcy restructuring, a business may, with certain exceptions, assume or reject executory contracts that it entered prior to bankruptcy. Where the ability to retain valuable executory contracts in a reorganization is uncertain, lenders are less likely to provide funds to businesses for startup or expansion. With Indian entities, however, there is no uncertainty; they cannot use this feature of the bankruptcy system because they cannot enter the system at all. Clearly, if lenders are reluctant to lend when there is still a possibility, however uncertain, that the debtor can retain the contracts in bankruptcy, they will be even less willing to lend when their Indian counterparties' exclusion from the bankruptcy system renders this option impossible.