If a corporation or an individual pays some creditors, but not others, bankruptcy lawyers call that a voidable preference. The preference allows the creditor to get more than it would in the collective bankruptcy process, so the extra bit can be recovered by the bankruptcy trustee.
Preferences are also at issue in the Argentine debt litigation. The Federal District Court in Manhattan has ruled that Argentina can’t pay cooperative creditors while stiffing the uncooperative ones.
Considered in this broader context, the suggestion that the United States should prefer some creditors over others seems somewhat problematic, to put it politely. But that is precisely what some, particularly House Republicans, have suggested the government should do if the $16.394 trillion debt limit is not raised and the United States runs out of cash to pay its bills.
The idea is that bondholders should be paid above all others, to avoid a default.
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I’m on record as saying a default is a really bad idea, the consequences of which are vastly understated by those who seem to approach the idea with an alarming degree of casualness.
But in any event, why is it O.K. for the United States to do something that many of the same people have suggested is wrong when done by Argentina?
And the mere suggestion that any debtor will engage in preferences itself has consequences.
In the case of the United States debt, if I know that (a) the government is going to prefer bondholders when it begins to run short of cash and (b) that the government will run short of cash in mid- to late February, then I think I’ll file my tax return and get my refund A.S.A.P.
I suspect a lot of other people will have the same idea, too. That, of course, will accelerate the date at which the government will run out of cash.
Then there are government contractors, who might think about submitting invoices a bit early.
Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and an expert on bankruptcy.
Article source: http://dealbook.nytimes.com/2013/01/18/an-argentine-parallel/?partner=rss&emc=rss
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