Hungary experimented with introducing an exceptionally harsh bankruptcy code in the mid-1990s. The technical details and primary effects of this regulation and practice have been thoroughly debated in the literature. The question yet to be addressed is what happens to bankrupt firms and their assets in transition economies. Nobody has tested what foundation there is for the fears of local policymakers and international financial organizations that pushing indebted firms into bankruptcy on a massive scale badly damages such an economy. Such action certainly causes micro and macroeconomic chaos that governments can hardly contain.

This paper sets out to shed light on whether such proceedings have done more harm than good during the transition process, by analysing Hungary's experience over a nine-year period. It focuses strictly on the microeconomic aspects. No policy issues or questions of institution building are tackled.