The 14th Amendment Meets the Bankruptcy Code
The danger of blogging—especially late on Friday in the Summer—is that it is too easy to jump in on issues that you haven’t considered fully, but I guess that is one of its joys as well.
As an outsider to constitutional law, I have found the discussion of the 14th amendment a tad odd. Section 4 of the 14th Amendment provides that “[t]he validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any state shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”
What does it mean that valid debts authorized by law “shall not be questioned?” I know what we would say if we were doing ordinary bankruptcy law. One of the key mechanical steps in an ordinary bankruptcy is what we call the allowance and disallowance of claims. A person who wants to collect from a person or firm in bankruptcy files a proof of claim with the bankruptcy court. The bankruptcy judge in turn subject to statutory standards has to decide whether that claim can be allowed or disallowed. The statute provides a number of bases for disallowing particular claims.
Allowance of a claim in bankruptcy just gets you in the door, just gets you the right to stand in line and participate in the case. It tells you nothing about priority of payment—that is your ability to get paid before someone else—and tells you nothing about the timing of payment. The original terms of a debt—legitimately owed debts—are changed all of the time in bankruptcy, indeed that is the point of the proceeding.
So what does it mean when Section 4 of the 14th Amendment says that debts cannot be questioned? I know with a bankruptcy lawyer would say: this is the equivalent of an automatic allowance provision. It means that a number of reasons that a debtor might have to challenge a particular debt cannot be asserted. But that says nothing—zero, nada, zilch—about whether a debtor can default on that debt or choose to prioritize one debt over another. That fact that a debt cannot be disallowed says nothing about default or timing of payment. And default and prioritization are the normal stuff of failing firms. They owe many legitimate debts and they can’t pay them all. The fact that your debt is legitimate—cannot be questioned—doesn’t begin to tell you for an ordinary debtor that you will get paid on time or that there will be no default.