Too Much Insolvency: 'Unmatured Interest' and 'Debt' Under the Code
Posted: 14 Dec 2017 Last revised: 22 Nov 2020
Date Written: July 1, 2018
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: Suggested Citation