Less than two months into the coronavirus crisis, and despite the massive infusion of federal funds, a rise in business bankruptcies has already begun, according to a recent Brookings Institute report by Prof. David Skeel. Even if the current efforts by Congress, the Federal Reserve, and Treasury to counteract the economic shutdown are effective, an enormous wave of bankruptcies may come. While the U.S. bankruptcy system ordinarily is quite effective, it faces major handicaps in the current crisis environment that Skeel says can be addressed by a number of proposals. Among his proposals are:
- A standstill on collection by creditors could magnify the protection for revenue-starved businesses, although he cautions that it would need to be handled carefully.
- Given the massive number of companies currently facing distress, regulators should consider setting up a program to support the simultaneous filing of multiple, “cookie cutter” pre-packaged bankruptcies.
-Recapitalize the company through an internal sale — a “sale to self,” in a sense. The debtor could transfer its assets and secured debt to a newly created entity, while leaving the stock and junior debt behind.
- Rather than thinking of governmental funding and private DIP loans as an either/or choice, the government could coordinate at least some of its funding with private lenders, rather than as a substitute for them.
- More judges are likely to be needed.
To read Skeel's full report, please click here.
