Bespoke Bankruptcy

The US Bankruptcy Code is the primary source of bankruptcy relief for debtors in the United States. But it is not the only source. Over the years, Congress has occasionally created bespoke bankruptcy—customized debt relief designed for a particular group of debtors. Bespoke bankruptcy contains many of the attributes of bankruptcy law, but it is not housed within the Bankruptcy Code itself. Thus, while the Bankruptcy Code provides standardized forms of bankruptcy relief through its various chapters, bespoke bankruptcy provides relief in a much more tailored form. Put differently, bespoke bankruptcy draws on principles from bankruptcy law but also provides access to mechanisms and processes that are not found in the Bankruptcy Code in order to respond to particular needs.

Bespoke bankruptcy may provide desperately needed bankruptcy relief to entities that are ineligible or otherwise unable to access bankruptcy through the Bankruptcy Code. For example, Puerto Rico is not eligible for any chapter of the Bankruptcy Code, and the US Supreme Court has determined that the territory may not enact its own bankruptcy laws. Instead, to address Puerto Rico’s severe financial distress, Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in 2016, which provided customized debt relief for Puerto Rico and its instrumentalities.

As Puerto Rico’s own experience with PROMESA illustrates, while bespoke bankruptcy may provide a path to structured debt relief where none otherwise exists, it can also be fraught with difficulties. For example, there have been numerous challenges to various aspects of the law as Puerto Rico has worked through debt restructuring proceedings. These challenges result, in part, from the uncertainty that arises when using a bespoke restructuring process. 

As the US Congress contemplates future changes to bankruptcy laws, to what extent should bespoke bankruptcy be used or developed instead of the Bankruptcy Code? In Bespoke Bankruptcy, I take up that question. The article first acknowledges the limitations of the Bankruptcy Code and highlights instances where Code-based bankruptcy relief does not work. It points out that some entities, which I call ‘bankruptcy misfits’, cannot fully optimize the bankruptcy relief offered under the Bankruptcy Code because they are so different in terms of structure, function, and/or regulation, from the entities that the Code was designed to serve.

The article then introduces the concept of bespoke bankruptcy and devises a framework that policymakers can use to decide when and how to implement it. In so doing, the article suggests that bespoke bankruptcy ought to perform a limited but critical role in providing relief to entities that the Bankruptcy Code either does not or cannot assist. Although more work needs to be done to identify entities that may benefit from bespoke relief, the process used in the article will enable policymakers to identify entities and assess whether bespoke relief is worth the costs in any particular circumstance.

The process suggested initially asks policymakers to consider whether a given entity can liquidate or whether it is societally important for the entity to remain viable due to the public nature of the goods or services it provides. If the entity must remain viable due to its social importance, we should further assess the need for bespoke bankruptcy by considering factors such as numerosity (eg, how many of these entities exist), similarity (eg, how similar individual entities are to each other), mismatch (eg, how well existing Bankruptcy Code chapters work or could work for the entity), and vulnerability to systemic risk or exogenous shocks.

The possibility of developing bespoke bankruptcy going forward, albeit in a limited fashion, also implicates larger questions about who should have access to bankruptcy relief and how much relief the bankruptcy system can be expected to provide. As scholars and policymakers consider these questions, it will be important to consider the various ways in which bankruptcy relief can be provided to entities that seek it, including through a more bespoke system.

Laura N. Coordes is an associate professor of law at Sandra Day O’Connor College of Law, Arizona State University.