Matthew T. Berry Bankruptcy Law Blog on Lawyers.com

Their plan is to overhaul U.S. financial regulations by allowing non-bank institutions to fail in bankruptcy court and, in turn, strip the Federal Reserve of decision-making powers. In addition, they want to see a chapter added to the bankruptcy code that will make “orderly failure” a practical solution for resolving issues surrounding troubled firms.

The new chapter will give bankruptcy judges the power to halt claims by creditors and counterparties to prevent runs on troubled institutions. The idea is aimed at averting situations in which the government uses federal funds to prop up companies that are deemed too big to fail, such as AIG, a non-bank institution and New York-based insurer that nearly collapsed in 2008. If this legislation passes, the change in bankruptcy litigation could have far-reaching effects.

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