We recently estimated the US bankruptcy system’s ability to absorb an anticipated surge of financial distress among American consumers, businesses, and municipalities as a result of COVID-19.
An increase in the unemployment rate has historically been a leading indicator of the volume of bankruptcy filings that occur months later. If prior trends repeat this time, the May 2020 unemployment rate of 13.3 percent will lead to a substantial increase in all types of bankruptcy filings. Mitigation, governmental assistance, the unique features of the COVID-19 pandemic, and judicial triage should reduce the potential volume of bankruptcies to some extent, or make it less difficult to handle, and it is plausible that the predictive power of the recent unemployment spike will be smaller than history would otherwise predict. We hope this will be so. Yet, even assuming that the worst-case scenario could be averted, our analysis suggests substantial, temporary investments in the bankruptcy system may be needed.
Our model assumes that Congress would like to have enough bankruptcy judges to maintain the average bankruptcy judge’s caseload at no more than it was during the last bankruptcy peak in 2010, when the bankruptcy system was pressured and the public caseload figures indicate that judges worked 50 hour weeks on average.
To keep the judiciary’s workload at 2010 levels, we project that, in the worst-case scenario, the bankruptcy system could need as many as 246 temporary judges—a very large number. But even in our most optimistic model, the bankruptcy system will still need 50 additional temporary bankruptcy judgeships, as well as the continuation of all current temporary judgeships.
The optimistic model begins with the observation that an unusually large number of the unemployed believe that they are only temporarily furloughed and will be back at work soon. Accordingly, we (optimistically) removed the excess-from-baseline number of unemployed who believe they will be back at work shortly—as if they will be back at work shortly with no adverse impact on the economy’s channel to bankruptcies. That reduction yielded a projected need of between 50 and 69 fewer judges to maintain a judicial workload no greater than the one bankruptcy courts faced in the 2009 financial crisis.
In other circumstances, the enormous uncertainty of what the bankruptcy caseload will be would warrant waiting to see what develops. And strong action probably will not occur until we see a major across-the-board rise in filings. (Large business filings are rising sharply now, but consumer filings are not rising.) The downside of a wait-and-see strategy is that full-scale bankruptcy court appointments need about a year to complete. The dilemma in what action to take now is that if bankruptcies do in fact rise by several-fold—a plausible but uncertain prospect—then waiting for the rise will lead to a large gap that will put the system one year behind where it ought to be if the filings had been anticipated as certain and acted upon. Hence, we recommend that the relevant players act on the optimistic estimation and re-assess bankruptcy needs as the economy evolves and more information develops.
Judicial appointments need not be for the full term of a bankruptcy judge. Capacity can be added via temporary judges (of which there already are some in the bankruptcy court system) and by recalling recent retirees who are willing to serve.
Our memorandum’s conclusions were endorsed by an interdisciplinary group of academics and forwarded to Congress.
Benjamin Iverson is an associate professor of finance at the Marriott School of Business at Brigham Young University.
Jared A. Ellias is a professor of law and director of the Center on Business Law at UC Hastings Law.
Mark J. Roe is the David Berg Professor of Law at the Harvard Law School.
This post was first published on the Harvard Law School Bankruptcy Roundtable and can be accessed here.