Symbolic representation of forum shopping in bankruptcy cases, showing an imbalance in economic opportunities.

Bankruptcy Venue: How Forum Shopping Impacts Local Economies

Beau Callahan in Business & Economy August 2025 • 4 min read.

"Uncover the hidden costs of lax bankruptcy laws and their impact on local labor markets."

When a large company declares bankruptcy, the focus is often on the immediate fallout: job losses, investor panic, and the ripple effects through the supply chain. However, a lesser-known aspect of bankruptcy proceedings is the significant flow of funds into legal services. These expenses aren't just dead-weight losses; they represent a transfer of resources to professionals in the legal sector, creating an economic stimulus that can partially offset the contractionary effects of the bankruptcy itself.

A recent study sheds light on this dynamic, revealing that bankruptcy shocks can actually increase legal employment in the counties where the bankrupt companies are headquartered. However, this benefit is not guaranteed. Lax bankruptcy venue laws and the increasing practice of 'forum shopping'—where firms strategically choose a bankruptcy court that is not in their local area—can nullify this effect, exporting potential gains away from the communities that need them most.

This article dives into this phenomenon, exploring the hidden economic costs of forum shopping and its impact on local economies. By understanding these dynamics, policymakers and communities can better address the unintended consequences of bankruptcy laws and strive for a fairer distribution of economic benefits.

The Shocking Truth: Bankruptcy Can Boost Local Legal Employment

Symbolic representation of forum shopping in bankruptcy cases, showing an imbalance in economic opportunities.

The legal sector often benefits from bankruptcy proceedings due to the increased demand for legal services. Bankruptcies require lawyers to represent the company, creditors, and other involved parties. These cases also involve legal clerks and paralegals, and others, creating a surge in employment needs.

A groundbreaking study has found that, in the early 1990s, each ongoing bankruptcy was associated with a 1% increase in annual legal employment for the county where the company was headquartered. This may seem like a drop in the bucket, but aggregated across the U.S., it translates to roughly 10,000 jobs each year, representing wages of nearly $1 billion in 2021 dollars.

Increased Demand: Bankruptcies generate a considerable demand for legal professionals.
Local Expertise: Lawyers certified to practice in the area of the bankruptcy court are essential.
Economic Relief: Bankruptcy cases provide communities economic stimulus by counteracting other negative economic impacts of local employment and businesses.

This increase in legal employment offers a crucial economic boost to communities grappling with the negative consequences of a major employer's bankruptcy, such as decreased consumer spending and business revenues. This is contingent on how firms file for bankruptcy.

Policy Implications: Leveling the Playing Field

The insights from this study are particularly relevant to the ongoing debate surrounding bankruptcy venue reform. By understanding the economic consequences of forum shopping, policymakers can make informed decisions about how to structure bankruptcy laws to support local communities and ensure a fairer distribution of the economic benefits generated by these proceedings. Addressing the issue is more than a matter of fairness; it’s about building resilient local economies that can weather economic storms and provide opportunities for their residents.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.1086/728370,

Title: Bankruptcy Shocks And Legal Labor Markets: Evidence From The Court Competition Era

Subject: econ.gn q-fin.ec

Authors: Chad Brown, Jeronimo Carballo, Alessandro Peri

Published: 31-01-2022

Everything You Need To Know

How does bankruptcy impact the local legal job market?

Bankruptcy significantly impacts the local legal job market by creating a surge in demand for legal services. When a company files for bankruptcy, it necessitates the involvement of numerous legal professionals, including lawyers, legal clerks, and paralegals. These professionals represent the bankrupt company, creditors, and other involved parties, leading to increased employment opportunities within the legal sector. A study revealed that each ongoing bankruptcy in the early 1990s was associated with a 1% increase in annual legal employment in the county where the company was headquartered.

What is forum shopping in bankruptcy, and why is it problematic?

Forum shopping in bankruptcy refers to the practice of companies strategically choosing a bankruptcy court that is not in their local area. This practice is problematic because it can nullify the positive economic effects of bankruptcy on local communities. Specifically, it can export potential gains, such as increased legal employment and economic stimulus, away from the communities that need them most. Instead of local legal professionals benefiting, firms may opt for distant courts, thereby redirecting resources away from the local economy.

How can bankruptcy proceedings provide an economic boost to a community?

Bankruptcy proceedings can provide an economic boost to a community by creating a demand for legal services. These cases require legal professionals to represent various parties, leading to a surge in employment for lawyers, clerks, and paralegals. The economic stimulus occurs because the fees paid to these legal professionals represent a transfer of resources, partially offsetting the negative economic impacts of the bankruptcy, such as job losses and decreased business revenue. The increased legal employment provides an injection of capital, supporting local businesses and spending.

What are the policy implications of forum shopping and its effect on local economies?

The insights into forum shopping have significant implications for bankruptcy venue reform. Policymakers can structure bankruptcy laws to support local communities and ensure a fairer distribution of economic benefits. By understanding that forum shopping can divert economic gains away from the communities that need them most, policymakers can make informed decisions to address the unintended consequences of bankruptcy laws and build more resilient local economies. Addressing forum shopping is about creating fairness and providing opportunities for residents to weather economic downturns.

In what ways does the location of the bankruptcy court affect the economic impact of a company's bankruptcy?

The location of the bankruptcy court significantly affects the economic impact of a company's bankruptcy because it determines where the demand for legal services is concentrated. If a company files for bankruptcy in its local area, the increased demand for legal services benefits the local community by boosting employment for lawyers, clerks, and paralegals. However, through forum shopping, companies may choose to file in a different location. This practice can shift the economic benefits to a different region, reducing the positive impact on the local economy that is already struggling with the negative consequences of the company's bankruptcy.