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States face massive fiscal challenges as the coronavirus pandemic tears into their budgets, and lawmakers are debating whether to distribute more aid at a time when many businesses will have to file for bankruptcy.
A nationwide lockdown has forced businesses to close their doors, or reduce operations, putting immense pressure on their budgets.
As a result, experts foresee “an enormous wave” of bankruptcies on the horizon.
“The current crisis could bring a much greater surge in business bankruptcy filings than either of the two most recent recessions,” researchers at the Brookings Institution said. “Prior to the current crisis, businesses took on an extraordinary amount of debt … This debt, coupled with the nearly complete shutdown of the economy and the fact that the revenues of many businesses will be slow to recover, even after economic activity resumes, suggests there will be a surge of business bankruptcies.”
Bankruptcies occur when a person or company takes on more debt than it is able to repay. When it files for Chapter 11 protection, it usually either liquidates its assets and shuts down or sets up a repayment plan to creditors.
Chapter 11 filing rose 14 percent in the first quarter when compared with the same period last year, according to data from the American Bankruptcy Institute – as cited by Dow Jones. That reflects only a fraction of the impact of the lockdown.
Lawmakers, however, have pushed back on the idea of allowing distressed states to file for bankruptcy.
Senate Majority Leader Mitch McConnell, R-Ky., has found himself at the center of the debate due to his comments criticizing states for wanting what he called a bailout. Instead, he has advocated for allowing states to file for bankruptcy.
“I would certainly be in favor of allowing states to use the bankruptcy route,” McConnell said during an interview on the Hugh Hewitt radio show.
He added that many states have dug themselves into a hole with their pension situations and that Republicans would oppose bailing out “state pensions by borrowing money from future generations.”
As the law currently stands, states cannot file for Chapter 11 protection, though cities and local governments can.
Some of the states most affected by the pandemic are facing massive budget shortfalls. As previously reported by FOX Business, the New York City Independent Budget Office estimates a budget shortfall for fiscal years 2020 and 2021 of $9.7 billion.
New York Gov. Andrew Cuomo suggested pushing states to declare bankruptcy would cause the U.S. economy to collapse.
However, proponents of the idea say that it would “save taxpayers a great deal of money.” Allowing states to file for bankruptcy protection was a proposal that gained traction during the financial crisis.
According to one of the theory’s proponents, restructuring would be the most likely option. Restructuring state finances would include things like renegotiating union contracts.
So far, the Trump administration has indicated it would be willing to give states additional aid.