Bankruptcy’s Role in the COVID-19 Crisis

15 Pages Posted: 2 Apr 2020 Last revised: 26 Jun 2020

See all articles by Edward R. Morrison

Edward R. Morrison

Columbia Law School

Andrea C Saavedra

Columbia University - Law School

Date Written: April 7, 2020

Abstract

Policymakers have minimized the role of bankruptcy law in mitigating the financial fallout from COVID-19. Scholars too are unsure about the merits of bankruptcy, especially Chapter 11, in resolving business distress. We argue that Chapter 11 complements current stimulus policies for large corporations, such as the airlines, and that Treasury should consider making it a precondition for receiving government-backed financing. Chapter 11 offers a flexible, speedy, and crisis-tested tool for preserving businesses, financing them with government funds (if necessary), and ensuring that the costs of distress are borne primarily by investors, not taxpayers. Chapter 11 saves businesses and employment, not shareholders. For consumers and small businesses, however, bankruptcy should serve as a backstop to other policies, such as the CARES Act. Consumer bankruptcy law’s primary goal is to discharge debts, but that’s not what most consumers need right now. What they need is bridge financing, and perhaps forbearance, until the crisis ends, they get back to work, and they regain their ability to pay their debts again. These key policy levers—bridge financing and forbearance—are available in theory to small businesses in Chapter 11, especially if the government supplies the bridge financing when credit markets are dysfunctional. The practical reality is that bankruptcy is expensive for small businesses, which may deter them from using it in the first place. Equally important, our courts will be flooded if Chapter 11 is the primary rescue policy for small businesses.

Keywords: Coronavirus, COVID-19, bankruptcy, reorganization, Chapter 11, CARES Act, bailout

JEL Classification: D14, G33, G34, K29, K35

Suggested Citation

Morrison, Edward R. and Saavedra, Andrea, Bankruptcy’s Role in the COVID-19 Crisis (April 7, 2020). Columbia Law and Economics Working Paper No. 624, Available at SSRN: https://ssrn.com/abstract=3567127 or http://dx.doi.org/10.2139/ssrn.3567127

Edward R. Morrison (Contact Author)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Andrea Saavedra

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States

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