We all know that times are hard for everyone, but especially for small businesses. And, without further state or federal aid, the fallout from our current times could cause a bankruptcy tsunami that could overwhelm the federal bankruptcy system.
What happens if the system is overwhelmed?
It could negatively affect the whole economy. This is because an overwhelmed federal bankruptcy system could cause the entire process to become chaotic with less time available to ensure that viable businesses stay viable. This, in turn, will mean that businesses that would have otherwise been saved, will be killed, and some may even be kept artificially alive.
Research by Robin Greenwood of the Harvard Business School, David Thesmar of the MIT Sloan School of Management and Benjamin Iverson of Brigham Young University’s Marriott School of Business is ringing the alarm bells. Their findings show that bankruptcies were down 1% this year has small businesses were able to hold on with state and federal aid. But, they except bankruptcies to increase by 140% this year as the economic woes on small businesses continue with no aid in sight.
Bankruptcies are not necessarily bad
Most economists agree that bankruptcies themselves are not necessarily bad. This is because it allows businesses to restructure debt and, ideally, emerge from bankruptcy stronger than before. And, even for those businesses that do not survive, the orderly reallocation of labor and capital helps rebuild the economy, especially during economic downturns.