(January 1, 2007)

US Politicians and members of the international human rights community have argued that it is fundamentally unfair to force citizens of a country to repay the debts incurred by a former brutal regime that oppressed them and violated their basic human rights. Until recently, arguments that successor governments should not be forced to repay the debts of former leaders or regimes relied almost exclusively on philosophical or humanitarian grounds.

This Article seeks to shift the discussion from the human rights, to the insolvency, arena and evaluates the doctrine of odious debts using the insolvency framework found in the United States Bankruptcy Code. The Article presents instances where businesses are allowed to repudiate promises made to groups typically favored in our society (employees), are allowed to discharge debts owed to favored (often governmental) creditors, or, are allowed to subordinate certain creditor claims. The Article then argues that allowing a new regime to repudiate odious debts is consistent with basic insolvency principles that the Bankruptcy Code applies to both consumer and business restructurings.

Entities that lend to, or invest in, sovereigns understand ex ante that many of the typical creditor remedies available upon default (repossession of collateral, replacement of managers) simply are not available in the context of sovereign lending. Given this, the Article stresses that sovereign debt restructurings will never resemble an typical insolvency proceeding or out-of-court workout and that, instead, sovereign debt restructurings should focus on the need both to rehabilitate the sovereign’s finances and also to allow the new leaders to perform the sovereign’s principal business function of providing essential health and human welfare services for its citizens.

View report