Bankruptcy Overload

Over the past few years, a growing number of scholars have sought to diagnose what is wrong with the US bankruptcy system. Congress has held hearings in search of an answer. And many answers have emerged, ranging from lack of balance to outright lawlessness. In my forthcoming paper, Bankruptcy Overload, I contend that these problems are part of a larger issue: the bankruptcy system is overloaded. Those who use it, whether debtors or non-debtors, frequently seek to extract more out of a bankruptcy than the process can, practically and legally, provide.

We have always asked the bankruptcy system to do a lot—indeed, the system’s flexibility and adaptability to new challenges and situations are often described as a feature rather than a bug. However, as our current system approaches its 45th birthday, it has become increasingly clear that users of the bankruptcy system are putting enormous pressure on it to do more, to resolve more issues, and to satisfy the needs and wants of a growing number of players. In the face of this increasing pressure, the system is beginning to buckle—and this buckling results in many of the problems scholars have identified with modern bankruptcy practice.

The paper uses the term ‘overload’ to describe the demands placed on the bankruptcy system by all of those who are involved in bankruptcy cases. Put differently, bankruptcy overload can be seen in the parties’ expectations that bankruptcy can be used to address their own issues, however large, small, or related to core bankruptcy principles those issues might be. In modern bankruptcy practice, parties seek to use the bankruptcy system for increasingly divergent purposes, some of which are in tension with bankruptcy’s more traditional uses, others of which may divert resources otherwise available to fulfil a debtor’s obligations.

Any overloaded system is bound to disappoint, and bankruptcy has proven no exception. Recent years have seen scholars and commentators railing against ‘abuse’ of the system, while Congress has held hearings seeking ways to combat these ‘abuses’. Somewhat ironically, parties’ outsized expectations about what bankruptcy can do for them have shaped the bankruptcy system so that, in appearance at least, it seems useful primarily only to a small group of elite players.

Although ‘abuse’ may be a catchy term, Bankruptcy Overload seeks to reframe the story, because in many ways, ‘overload’ more precisely describes the various phenomena occurring within the bankruptcy system. Framing the problem as ‘overload’ rather than ‘abuse’ also helps to widen the frame of reference and points toward ways to resolve the problems plaguing the system.

The goals and boundaries of bankruptcy law have always been subject to debate, making the system particularly susceptible to taking on more than it can bear. Over the years, many have embraced the resulting uncertainty of the limitations of bankruptcy as a necessary by-product of bankruptcy’s built-in flexibility. However, even a system with significant capacity can be overloaded, and the paper’s core claim is that the bankruptcy system has reached that point. To support this claim, I provide accounts of various ways in which debtors and non-debtors alike push an increasing amount of work into the bankruptcy system. Non-debtors have used bankruptcy to accomplish what they could not otherwise do outside of bankruptcy and have attempted to use the system as a vehicle for personal or dignitary justice. For their part, debtors use bankruptcy to obtain advantages in non-bankruptcy litigation and, potentially, as a shortcut to gloss over due process.

By viewing bankruptcy’s flaws as a product of overload, the paper provides new ways of thinking about what is happening in bankruptcy law and makes a valuable contribution to the existing scholarly literature. Framing the concept as one of overload allows us to connect and reframe many of the existing scholarly criticisms of bankruptcy in a coherent, comprehensive way, while in turn revealing deeper systemic flaws.

The paper defines and explains the concept of bankruptcy overload, illustrating that many of the problems currently plaguing the bankruptcy system derive from overloading it. In addition, although overloading the system may create problems in individual cases, the paper shows that bankruptcy overload is systemically harmful, and that failure to recognize and address it will undermine the system’s long-term utility. Those seeking changes to bankruptcy law must be aware of the system’s capacity constraints. In addition to defining bankruptcy overload and identifying its harms, the paper illuminates ways to address many of the issues present in bankruptcy today while being cognizant of the effect of changes to bankruptcy law on the system as a whole.

Laura N Coordes is Professor of Law at the Arizona State University.

A previous version of this post has been published on the Harvard Bankruptcy Roundtable Blog.