COVID-19 Debt and Bankruptcy Infrastructure

By Robert K. Rasmussen (USC Gould School of Law)

Robert Rasmussen

The COVID pandemic put unprecedented pressure on all economies around the world. Many predicted that this economic dislocation would lead to an unprecedented number of corporate bankruptcies. This did not happen. The American government and other governments responded with extraordinary measures. While these measures allowed companies to ride out the worst of the pandemic, they did have consequences. Many large companies were left with unprecedentedly large amounts of debt on their balance sheets.

 Perhaps a robust economy will allow companies to grow their way out from under their debt burden. But perhaps not. To prepare for the possible future increase in large companies filing for bankruptcy, Congress should act now to build up a bankruptcy infrastructure sufficient to handle an influx in cases. Specifically, Congress should require that every circuit create a “business bankruptcy panel” designed to administer the Chapter 11 filing of large companies. As is well-known, three bankruptcy districts currently serve as dominant venues for large cases – the District of Delaware, the Southern District of New York and the Southern District of Texas. It is by no means clear that these three courts could handle a significant increase in caseloads. Creating expertise across the country would help prepare the system for any future rise in cases. A secondary benefit of this reform is that it may also ameliorate some of the concerns that have been raised over the years by the dominance of a small number of venues for large corporate cases.

The full article is available here.

Planning for an American Bankruptcy Epidemic

By Ben Iverson (Brigham Young University), Mark Roe (Harvard Law School)

Ben Iverson
Mark Roe

The COVID-19 pandemic looks likely to cause a surge in bankruptcies in the United States—conceivably a surge as rapid and as substantial as the U.S. court system has ever experienced. A significant and rapid increase in judicial capacity to manage the flood of cases is more than appropriate, we argued in a recent op-ed.

Bankruptcy filings in the United States have historically peaked several months after a surge in unemployment. And American unemployment is now rising at an unprecedented rate, with more than 30 million claims filed in the last six weeks. If historical patterns hold, the bankruptcy surge would be on track to be the largest the American bankruptcy system has experienced.

Bankruptcy works well enough and quickly enough in normal times, particularly for restructuring large public firms. But it cannot work as well, and the economy will suffer, if the bankruptcy system is overloaded. Delays in critical vendor orders, DIP loan approvals, pre-packaged bankruptcy confirmations and the like could all slow commerce unnecessarily.

The full op-ed is available HERE.