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Bankruptcy Courts Must Be Beefed Up Before Surge, Academics Say

May 8, 2020, 5:05 PM

Congress should increase the number of bankruptcy judges and secure additional funding for the bankruptcy system ahead of an anticipated surge in filings spurred by the Covid-19 pandemic, a committee of scholars said.

“We strongly believe that our bankruptcy system, if properly staffed, will be capable of managing the financial distress that the pandemic has created for large corporations,” University of California, Hastings Law School professor Jared Ellias wrote in a letter sent late Thursday.

But a flood of consumer and small business filings can clog up the courts for large business reorganization cases and municipal filings, both of which require more attention by the judges, Ellias told Bloomberg Law Friday.

Ellias is the chair of the Large Corporations Committee of the Bankruptcy & COVID-19 Working Group, which was formed in late March by about 20 law, business, economics, finance, and banking scholars across the country.

The committee addressed the letter to House Speaker Nancy Pelosi (D-Calif.), House Minority Leader Kevin McCarthy (R-Calif.), Senate Majority Leader Mitch McConnell (R-Ky.), and House Minority Leader Charles Schumer (D-N.Y.) seeking resources “to prepare for what we fear could be a flood of large corporate bankruptcies arising out of this pandemic.”

The committee’s goal is to present data-driven, empirically sound suggestions for Congress to consider when it takes up the next piece of legislation to address the effects of the near complete shutdown of economies across the country, Ellias said.

Bankruptcy judges and practitioners, as well as the businesses themselves, already have their advocates. There hasn’t been a voice speaking for academics, he said.

We haven’t yet seen the pandemic’s effect on large corporate Chapter 11 filings, Ellias told Bloomberg Law. Companies like Neiman Marcus and J. Crew, both of which recently filed, were struggling long before the coronavirus spurred widspread shutdowns, he said.

But we are starting to see more filings for small businesses that don’t have the resources to keep going over an extended downturn, Ellias said.

“Congress can prepare for a bankruptcy surge at a relatively low cost today,” the committee said in the letter. “The time to act is now before any flood of bankruptcies begins.”

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editors responsible for this story: Seth Stern at sstern@bloomberglaw.com; Laura D. Francis at lfrancis@bloomberglaw.com

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