June 29, 2020
Marketplace
Many economists and bankruptcy lawyers expect a wave of bankruptcies coming this year.
Giant bankruptcies of companies that owe more than $100 million, are
up 40% from a year ago, which means they are up 120% from 2018. Chapter
11 bankruptcies of all kinds have increased 20% since last year. This
is obviously traumatic for the people who work at those companies but
there is a silver lining.
“It’s an overstatement to say that bankruptcy is this deeply
undesirable thing,” said Jared Ellias, professor of law at UC Hastings
College of Law.
“One of the great things that happens after bankruptcy is a company
leaves, and they’re hopefully positioned to thrive,” he said.
The post COVID-19 economy is going to be very different and a lot of
businesses will need to radically reinvent and reinvest in themselves in
order to adapt. Chapter 11 bankruptcy lets companies do that. Which is
why Ellias and a group of academics are concerned that if there are too
many bankruptcies, the courts might get overwhelmed and companies won’t
get the help they need.
“When a company is in financial trouble, they can’t invest, they
can’t hire, they can’t give people pay raises, they can’t do the things
that businesses need to do to be attractive places to work,” Ellias
said.
So if you slow down the process of transformation, it slows down the entire economy.
“There have been proposals to bring back some retired bankruptcy
judges, recently retired bankruptcy judges, and you also would need to
add personnel at the clerk’s office level as well,” said Robert Keach,
an attorney who specializes in business restructuring and insolvency at
the Bernstein Shur law firm.
Congress also made it a lot easier, faster, and cheaper for small
businesses to go through the bankruptcy process through reforms in 2019
and through the CARES Act, according to Keach. But judges take time to
hire, and there is only so much you can do, he said, so a lot will
depend on just how bad the bankruptcy wave will be.
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