May 14, 2020 - With each passing day it seems that another iconic company files for protection under Chapter 11 of the bankruptcy code. Indeed, according to Fitch Ratings the trailing 12-month default rate for institutional leveraged loans is 3.1% and they predict that cumulative default rate for 2020-2021 could be 15% or more. Is the bankruptcy court system ready to handle what may be an unprecedented volume of corporate bankruptcy cases? To a number of distinguished bankruptcy scholars who are analyzing the impact of the COVID-19 pandemic on large American businesses, the answer to that question is an emphatic “no” and they recently urged leaders of Congress to immediately authorize the appointment of temporary bankruptcy judges and increase the budgets for existing bankruptcy courts. A similar sentiment was expressed in a recent op-ed, “Planning for an American Bankruptcy Epidemic”, which warned that the “trifecta” of millions of insolvent consumers, thousands of small business failures and many bankruptcies of large firms could overwhelm the bankruptcy court system. The authors of the op-ed point out that if only 0.9% of the 30 million newly unemployed filed for bankruptcy, the bankruptcy caseload would exceed the peak experienced during the Great Financial Recession in 2010. They note, too, that research has demonstrated that when bankruptcy courts become crowded cases take longer to resolve, more small businesses are liquidated, and creditors recover less. So, what to do? Both the bankruptcy scholars and the authors of the op-ed recommend appointing additional temporary bankruptcy judges and increasing the budget for existing bankruptcy courts to enable the recalling of retired judges, supporting the travel of judges to locations outside their districts, and employing additional staff such as law clerks and judicial assistants. They emphasize that because bankruptcies typically lag increased unemployment by a number of months, there is a small window of opportunity to act, but Congress must act now, before the floodgates open.
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