Will Contractors Sue After Default Day?

What happens on the day after Aug 2 if the debt ceiling is not raised? FrumForum this week contacted a number of government vendors and contractors who unanimously stated: they had no idea whether they would be paid or not.

The Washington Post today offers some guesses.  David Frum has suggested that people owed money by the US Government will go into debt themselves, but ultimately will be forced to litigate, lay off workers or default on their own obligations.

In 1985, under circumstances very similar to the debt ceiling crisis of today, the U.S. Government Accountability Office issued an opinion asserting that the Secretary of the Treasury is within his rights to not only prioritize debt service over domestic spending, but also more broadly “liquidate obligations in any order it finds will best serve the interests of the United States” in a situation where Congress fails to raise the debt ceiling.  The GAO reaffirmed that position in May of this year and an independent report from the Bipartisan Policy Center agreed that the Executive Branch may be forced to simply "pick winners and losers."

But the GAO position only states that the Treasury Secretary has the right to prioritize the order of payment, not void contracts.  The obligations would still be in force and the U.S. Government would still have defaulted on an obligation and unpaid creditors could theoretically attempt to sue in federal court.  Whether a contractor whose biggest client is the U.S. Government would actually take their client to court over a ten or fifteen-day delay is another matter.

But if the delay gets longer - all bets are off.