Chapter 14 Bankruptcy

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 What Is Chapter 14 Bankruptcy?

Chapter 14 is not currently a part of United States law. The laws pertinent to bankruptcy are found in Title 11 of the United States Code (U.S.C.), which may also be referred to as the bankruptcy code. The law explains several different types of bankruptcies that may be filed, but does not include a Chapter 14 at this time. However, a Chapter 14 has been proposed in the past a couple of different times.

The proposed Chapter 14 would provide a bankruptcy procedure for very large financial institutions, or corporations, who are in extreme financial distress. Proposals for a Chapter 14 starting appearing around the time that several major Wall Street financial institutions were in this type of financial distress, but were considered “too big to fail.” Chapter 14 would attempt to provide those institutions a bankruptcy that would help avoid the need for them to be “bailed out.”

What is the History of Chapter 14?

A Chapter 14 proposal has been discussed in various versions at different times.

Following the financial crisis in 2008, in which large financial institutions in financial distress were deemed “too big to fail” for the impact their failure would have on the U.S. economy, President Barack Obama’s administration passed the Dodd-Frank Act, which allowed for the Federal Deposit Insurance Corporation (FDIC) to have oversight of financial institutions to prevent future failures.

Following this, in 2012, a proposal for a Chapter 14 was published by Thomas Jackson of the Hoover Institution (which studies economic policy). In the proposal, Jackson discussed not only the creation of a Chapter 14, but the requirement that financial institutions needing bankruptcy use it. The need for a definition of what qualifies as a “financial institution” is discussed.

The proposal also discusses combining certain aspects of Chapter 7, which allows for liquidation, and Chapter 11, which allows for the reorganization of companies. The new Chapter 14, as proposed, would serve either in addition to or instead of the Dodd-Frank Act, but in either case, would do away with some of its oversight powers. It also proposed that Chapter 14 cases be heard by U.S. District judges, instead of bankruptcy court judges.

Since Jackson’s proposal, Chapter 14 has again been discussed.

A new report by the U.S. Treasury Department, the Orderly Liquidation Authority and Bankruptcy Reform, was issued in 2018, with the proposal of eliminating the oversight of large financial institutions created by the Dodd-Frank Act.

A Chapter 14 addition to the bankruptcy code was once again proposed. Under this new version, companies would have 48 hours after petitioning the court for Chapter 14 bankruptcy to transfer their assets to a new “bridge company.” The idea behind this is to avoid disruption of the financial market.

What Would be the Essence of Chapter 14? How is it Different from other Bankruptcy Chapters?

As mentioned above, Chapter 14 would, per Jackson’s proposal, combine elements of both Chapter 7 and Chapter 11 bankruptcies. Under Chapter 7, liquidation takes place, which means the company’s assets would be sold off because it cannot pay its debts. Under Chapter 11, the company is allowed to “reorganize” its debts in order to stay functioning as a company.

In addition the combining these aspects into a Chapter 14, the new chapter would also work to make the oversight created by the Dodd-Frank Act unnecessary.

What are the Opinions on the Chapter 14 Proposal?

There are, of course, different viewpoints on whether a Chapter 14 addition to the bankruptcy code is the best method for handling the failures of large financial institutions. Some support a Chapter 14, because they do not believe that financial corporations should be subjected to oversight, as required by Dodd-Frank. Others oppose a Chapter 14, because they say it is not workable in practice.

Who Would be Able to File for Chapter 14 Bankruptcy?

Chapter 14 is meant to be used by financial institutions who are in extreme financial distress, and who are so large that their failure would have an appreciable impact on the United States economy.

The main goal of Chapter 14 is to reorganize and restructure the debt in such a way as to avoid the irreversible step of a Chapter 11 bankruptcy.

Do I Need a Lawyer If I Have Questions Regarding Chapter 14 Bankruptcy?

Although Chapter 14 is only a proposal at this point, and not law, it is clear that both existing law and proposed law on bankruptcy is complex. A company or financial institution who is experiencing financial distress to the point of needing to file for bankruptcy should certainly work with experienced bankruptcy lawyers to resolve the situation. The attorney can help the company file for bankruptcy under one of the appropriate, currently-existing bankruptcy Chapters, unless and until Chapter 14 is passed as law.

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