US bankruptcy law has represented an important international point of reference for both corporate and personal insolvency law and policy. Chapter 11 of the US Bankruptcy Reform Act of 1978 embraced corporate reorganisation and rescue as central bankruptcy goals, providing employees with continuing employment, giving value to its creditors and contributing to the community. To achieve these goals, the Act permitted existing management to remain in control (so-called debtor in possession), with an exclusive right to initially develop a reorganisation plan, and envisaged the possibility of an insolvent company obtaining new financing (debtor in possession financing), rejecting existing contracts and “cramming down” dissenting creditors in a reorganisation plan. The ideas and approach of Chapter 11 have influenced not only international institutions such as the World Bank and UNCITRAL but also reforms in several jurisdictions.
Individual bankruptcy law in the US provides a form of social insurance in a country with an open credit system, limited public health insurance and a modest social safety net. The 1978 Act offered individual debtors the alternative of a relatively swift fresh start through the liquidation of non-exempt assets (Chapter 7) or the alternative of a partial repayment of debt usually over three years with the possibility of retaining assets such as a home (Chapter 13). Lawmakers hoped that Chapter 13 would be the preferred choice of consumers, although in practice a substantial majority of consumers use Chapter 7. Chapter 13 influenced European reforms of personal insolvency in the late twentieth and early twenty-first centuries in response to growth in over-indebtedness (see e.g. J. Niemi, I. Ramsay and W. Whitford (eds.), Consumer Bankruptcy in Global Perspective (Oxford 2003)). In terms of creditor–debtor relations, the 1978 Act was mildly pro-debtor with Chapter 11 perhaps representing one aspect of “the new spirit of commercial law” (Alcoa v Essex Group 499 F. Supp 53 (1980)) while also recognising that consumer over-indebtedness reflected unfortunate changes of circumstances or at worst poor debt management.
Melissa Jacoby in Unjust Debts lays out a withering critique of the contemporary US bankruptcy system, describing both the transformation (or rather deformation) of Chapter 11 since 1978 and the increasing failure of individual bankruptcy to provide a safety net for US consumers of modest means. Chapter 11, far from representing a progressive form of reorganisation with management taking into account the interests of all creditors, is now dominated by corporate financiers and their lawyers, often requiring a quick sale of the company (a so-called section 363 sale), avoiding the procedural safeguards of Chapter 11 and permitting buyers to take control of the company free from contractual obligations to more vulnerable creditors including employees. Changes in finance capital, including the rise of distressed debt funds and private equity, mean that corporate bankruptcy may often represent a contest for corporate control of a reorganised firm with little concern for its wider objectives. These changes are so significant that a standard textbook now divides corporate reorganisation into the “old” and “new” Chapter 11. Jacoby illustrates well the central influence of private finance capital in contemporary corporate insolvency.
Jacoby is also critical of the increased use of Chapter 11 to address widespread economic and social problems of mass tort liabilities, such as asbestos, Dalkon shield, child sexual abuse and the opioid crisis. She demonstrates how in practice these bankruptcies have often not provided effective or fair compensation for the victims but rather shielded the primary actors from further liability, through the bankruptcy law power to stay actions and cancel legal obligations not only against the companies but also third parties. These cases, in her view, take the bankruptcy system into policy problems for which it has little training or preparation.
Individual bankruptcy meanwhile has become more complex. Organised credit industry lobbying, which portrayed bankrupts as lacking in personal responsibility, resulted in the 2005 amendments (Bankruptcy Abuse and Consumer Protection Act of 2005). This introduced a means test for Chapter 7 bankruptcy and a more complicated application process, along with required counselling for all bankrupts. These increases in the costs of access to bankruptcy (now approximately $2,000) mean that the US no longer has a simplified and accessible system of debt cancellation for families of modest means.
A particularly damning critique concerns the racism pervading the bankruptcy system. Jacoby documents empirical studies which indicate that black debtors may be steered towards Chapter 13 where they are more likely to fail to complete a plan and receive a discharge of debts. She also points to how facially neutral laws such as limits on the dischargeability of government fines have had a disparate impact on black consumers, while the ability of municipalities to discharge liabilities in bankruptcy has often resulted in the ability to severely compromise civil rights suits.
The contrasting treatment of corporate and individual bankruptcy is a leitmotif throughout the book. Corporate actors and their lawyers have been able to play fast and loose with the Bankruptcy Code, whereas individuals in bankruptcy are subject to much greater scrutiny and value judgements of their “worthiness” to access bankruptcy. Bankruptcy law seems to entrench class and racial inequalities in American society. Jacoby provides some possibilities for reform. These include the distinct treatment of differing types of claims so that, for example, involuntary creditors – often “survivors of wrongdoing” – are not treated similarly to credit card companies, simplification of consumer bankruptcy, perhaps on the model of Senator Elizabeth Warren’s current Consumer Bankruptcy bill, and a greater diversity in those teaching and working in the bankruptcy system.
Unjust Debts provides a clear and cogent indictment of current US bankruptcy law, accessible to non-specialists. It certainly fits the publisher’s goal of sparking conversations about key political and social issues of the day. It should be placed in the context of continuing historical controversies over the role of individual bankruptcy in American life. A long conflict exists, going back to at least the 1930s, between creditor interests desiring greater steering of individuals to Chapter 13 type repayment plans and those defending liberal access to bankruptcy. The Chandler Act of 1938, which introduced Chapter 13, was supported warmly by retail creditor groups as a more effective remedy than individual wage garnishment, in a political context where labour interests and wage earners had little input to the legislation (E. Zacklin and C.N. Thurston, The Political Development of American Debt Relief (Chicago 2024), 108). It is ironic that the model of the court-supervised debt repayment plan under Chapter 13 inspired many European reformers wishing to address the plight of over indebted individuals at the end of the twentieth century. Racialisation of debt relief also has a history. Facially neutral debtor protections, such as homestead exemptions, benefited primarily white rural dwellers and, in contrast to Chapter 13, Congress responded positively to white farmers’ plight during the depression by enacting Farm Mortgage Moratorium Acts in the 1930s.
Jacoby’s analysis of contemporary consumer bankruptcy suggests that it might be attempting to function more as an attempt at disciplining debtors, rather than a step towards a fresh start. This insight might be related to other critical literature on consumer credit, conceptualising it as a form of secondary exploitation of lower income individuals who must often use high-priced credit simply to make ends meet in the face of stagnant wages, to pay for services if they fall ill, have a family breakdown or lose their jobs (see e.g. S. Soederberg, Debtfare States and the Poverty Industry: Money, Discipline and the Surplus Population (Abingdon 2014)).
Bankruptcy and insolvency law is often viewed as a technical, specialised subject with corporate insolvency the dominant focus of much academic study. Jacoby’s book underlines the importance of studying both corporate and individual insolvency law to understand the often differing stances of state law to corporate and individual debt, and as an arena of distributional and political conflicts between different sectors of capital (e.g. finance capital and trade credit), labour and capital, and capital and consumers.
Jacoby’s critique does not represent a lone voice among US bankruptcy scholars with others suggesting that the US Code’s days as a “paragon may be waning”(E. Warren, J. Westbrook, K. Porter and J. Pottow, The Law of Debtors and Creditors, 7th ed. (Boston 2014), 320). Jacoby’s book also has an international message. Reformers of corporate bankruptcy law in other jurisdictions than the US may continue to appeal to Chapter 11 as a model for reform. However, without a clear-eyed understanding of the contemporary US law in action, they run the danger of appealing to a historical relic. This book is a welcome and important addition to critical literature on the role of bankruptcy and insolvency law.
