No: Business Bankruptcies Should Be Viewed as a Symptom and Not a Cause.


Eye on Bankruptcy

This week several people have asked whether new chapter 11 bankruptcy filings are evidence that our nation must change course immediately.

I do not believe that fear of an increase in business bankruptcies (from historic lows) should cause panic or abandonment of the best practices recommended by the medical experts.

I have worked on Chapter 11 reorganizations for over 30 years. I started as an associate at a major firm, I have led my own firm and I have chaired the insolvency practice of one of our state’s largest firms. For decades, we have used Chapter 11 reorganizations to save jobs, preserve supply chains and redeploy assets after a technological change, industry shift, or macroeconomic event caused a cash flow problem.

It is predictable that a small, but not insignificant, number of businesses may need to restructure sometime during their life cycle. Those of us who help guide businesses through Chapter 11 reorganizations knew there would be a drop in chapter 11 filings (and a drop in cases from which we could train the next generation) over the past few years. How did we know? Because the great recession wiped out many small businesses, caused credit restrictions, and lead to business consolidations, such that we had 7 years of a severe drought of new businesses.

When you reduce the number of new businesses being formed, you also reduce the future number of businesses that will need to restructure (just as a drop in birth rate over a decade, will reduce the number of people who will die 6-8 decades later). More recently, we have had a couple years of new business formations. As a result, we expected to see an increase in Chapter 11 filings over the next decade.

Now we have a pandemic. In addition to the loss of life, we are going to have financial losses. As much as cash-flow disruptions hurt (and they really do hurt), that is a symptom and not the cause of the problem. We will need a thoughtful national plan, we will need plans to reduce and/or increase restrictions in response to “hot spots,” we will need testing, we will need data, we will need leaders prepared for the roughest storm, but capable of using a gentle touch to steer us through these turbulent waters.

This nation has incredible resources. The greatest of those resources are our scientists, our economists, our brave first responders and health care workers, and the American people who have risen time, and time again, to help our neighbors (after hurricanes, blizzards, tornadoes, and floods). We are truly all in this together. We may disagree about how to best get through this, but that should not stop us from trying to work shoulder to shoulder (figuratively) to get through this pandemic. We should take the virus seriously. We should plan to mitigate its toll on our society.

But, we do not need to panic.

Stay safe all.