Too Much Insolvency: 'Unmatured Interest' and 'Debt' Under the Code

Posted: 14 Dec 2017 Last revised: 22 Nov 2020

Date Written: July 1, 2018

Abstract

An unacknowledged fact about the Bankruptcy Code's definition of "insolvent" is that it requires unmatured interest to be counted as debt. Ignored in practice, this statutory requirement makes no economic sense, but remains a trap awaiting a litigant in front of a court compelled to apply the statute's plain meaning. I lay out the clear statutory argument and explain why it makes no economic sense. While ignoring unmatured interest in the solvency calculation avoids some absurd results, it may also create perverse incentives to choose higher-yield debt over lower-yield debt.

Keywords: Insolvency, Solvency Tests, Bankruptcy Code

JEL Classification: K00, K20, K22

Suggested Citation

Heaton, J.B., Too Much Insolvency: 'Unmatured Interest' and 'Debt' Under the Code (July 1, 2018). American Bankruptcy Institute Law Review , Forthcoming, Available at SSRN: https://ssrn.com/abstract=3087583 or http://dx.doi.org/10.2139/ssrn.3087583

J.B. Heaton (Contact Author)

One Hat Research LLC ( email )

Chicago, IL
United States
(312) 257-3900 (Phone)

HOME PAGE: http://www.onehatr.com/

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