In Case You Missed This: America is facing an unprecedented wave of bankruptcies. It must act now

The US has a narrow window to prepare its courts and judges for an epidemic of bankruptcies and ensure the smooth passage of restructuring. Leaving the system to be overwhelmed would spell economic disaster

The View by Ben Iverson and Mark Roe

US President Donald Trump speaks before signing the Paycheck Protection Programme on April 24, to back small businesses on the brink of bankruptcy. Photo: AFP

Neiman Marcus and JC Penney, two of America’s retailing giants, recently failed to pay interest on their debt. We should expect one or both firms to file for bankruptcy soon, heralding a surge of US business failures caused by the Covid-19 pandemic. And, with most American households lacking the cash to pay expenses for three months, many families and individuals will declare bankruptcy, too.

Before long, the US could face a trifecta of millions of insolvent consumers, thousands of small-business failures and many bankruptcies of large public firms, with whole industries going broke at the same time.Bankruptcy filings in the US have historically peaked several months after a surge in unemployment. And US unemployment is now rising at an unprecedented rate, with more than 30 million claims filed in the past six weeks. If historical patterns hold in the coming months, the bankruptcy surge could be the biggest that the US court system has ever experienced.

Bankruptcy works well enough and quickly enough in normal times, particularly in restructuring large public firms. But it cannot work well, and the economy will suffer, if the system is overloaded and businesses become stuck in legal proceedings.

Source: Project SyndicateIf bankruptcies surge as they did following the 2008-10 financial crisis, then, based on how long it takes to handle each case, we calculate that a US bankruptcy judge would have to work close to 50 hours per week to keep up with the increased caseload.In fact, the economy is already contracting more sharply than during the 2008 financial collapse, suggesting that a bankruptcy surge at double the 2010 rate is plausible.

Even if only a minuscule 0.9 per cent of the 30 million newly unemployed filed for bankruptcy, the bankruptcy caseload would exceed the 2010 peak. No one can expect bankruptcy judges to work 100 hours per week. They will have to cut corners and neglect some cases by judicial triage.Government support under the Coronavirus Aid, Relief and Economic Security (CARES) Act will prevent some immediate bankruptcies. But many businesses will still struggle to meet their obligations to creditors, employees and suppliers.And then, like Neiman Marcus, JC Penney, and much of the oil industry, they will still be unable to pay their debt. Bankruptcies surged during the 2008-10 crisis, too, despite substantial government economic aid.

Coronavirus: Is the gig economy dead, and should the self-employed worry?

Contrary to what many may believe, bankruptcy is not a death knell, particularly for public companies with a viable underlying business. For businesses that can make money, bankruptcy does not mean a shutdown and liquidation. With the proper resources, bankruptcy judges are extremely effective at restructuring such firms into viable, competitive companies.

Over the past few decades, for example, most US airlines have restructured in bankruptcy and emerged healthy. Moreover, bankruptcy allows small-business owners – say, failed restaurateurs – to put their debts behind them and start anew. So, maintaining an effective bankruptcy system process is important for the US economy’s health……..more here

Click here for reuse options!
Copyright 2020 Hiram's 1555 Blog