By Edward R. Morrison and Andrea C. Saavedra (Columbia Law School)
Current COVID-19 policies treat bankruptcy law as a last resort for stressed businesses and consumers. We think that’s a sensible approach for small businesses and consumers, but not for large corporations. What many small businesses and consumers need now is quick access to liquidity and other forms of forbearance or debt forgiveness, not the debt-discharge of bankruptcy. Even for those who need a debt-discharge, it makes sense to offer them liquidity now and thereby ease the burden on our bankruptcy system, which could be overwhelmed by a flood of filings. In our view, it’s better to stabilize households and small businesses immediately and worry about restructuring their balance sheets after the crisis ends.
For large corporations, however, bankruptcy should be a front-line policy tool. Many were financially fragile before the current crisis, due to high leverage or operational problems. For them, government-backed financing should be provided during a bankruptcy process that cures these problems and forces investors, not taxpayers, to bear the costs of cure. Government action should save businesses (and jobs), not investors. This is a crisis-tested policy response, as we saw in the 2008 Financial Crisis: Both Chrysler and General Motors received government-backed financing during their bankruptcy cases. To be sure, an increase in filings by large corporations would burden our bankruptcy courts but our courts, and the professional bar and consultant industry that supports them, are well prepared to assist these corporations (and fairly represent and protect all parties’ interests), as they have done in past crises.