
Swamped bankruptcy courts threaten US recovery - hhs
https://www.ft.com/content/14b07c0e-95e3-11ea-af4b-499244625ac4
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nostrademons
My wife has also been seeing an increase in strategic defaults. These are
cases where the company could easily make its loan payments, could in fact pay
off the loan entirely with the cash it has in the bank - but chooses not to.
The court systems are overloaded and oftentimes closed right now, the lawyers
all have to work over Zoom, so what's the lender gonna do? The company views
it as more important to hold cash in the bank right now than to service
existing loan obligations that its creditors can't enforce anyway.

The entrepreneur in me is saying that the biggest start-up opportunity in
America right now is a government. We're on the verge of a cascading failure
in the legal and political system, and few people realize how much of
civilization rests on having a functioning legal system.

~~~
Spivak
Naive/uninformed question, is this something that shouldn't be allowed? Do
business loan contracts not have provisions/penalties in the case of missed
payments that apply outside of a court? Why shouldn't the business take the
penalty if cash on hand is more valuable to them?

The courts aren't going to be tied up forever, your borrowers have the money
to meet their obligations, and presumably they'll eventually make payments.
Outside of the pain of having to ride out the storm is there any real risk?

Like it doesn't sound super weird to me that a family will "strategically
default" on their mortgage despite technically literally having the cash to
pay it because they're scared of not being able to buy food in a month.

~~~
sandworm101
>> in the case of missed payments that apply outside of a court?

When someone owes you money you have two choices: The courts, or rounding up
some people with guns and taking the money yourself. It is either the courts
or anarchy. Businesses know this. When they don't pay their debts they know
the options for creditors are very limited. Getting money out of a business
that really doesn't want to pay takes many trips to the courthouse. Eventually
you end up foreclosing on some asset, a process that takes many months.

Banks don't just hand over their client's cash because a court says they own
money. Banks require court orders naming specific accounts. A business trying
to avoid creditors can easily move money around faster than the creditor can
get court orders.

~~~
londons_explore
But, if we consider this discussion to be purely businesses which have enough
cash on hand to pay, I'd guess:

If the loan contract says "for each missed or late payment, a fee of 25%
applies", then the lender can chase it up at their leisure, and overall will
likely come out ahead.

I suspect the issue is some loans didn't have the "25% fee" written into the
contract, and in that case, a court will likely only assign costs plus a
nominal interest. If the court queue is years long, then effectively they can
pay a few years late, and the costs can't be all that much if no court
appearance has happened.

~~~
nostrademons
The loans in question actually did have very strict collateral clauses -
basically if the borrower defaults the lender can take possession of assets
that basically put the borrower out of business.

There are three possible explanations for why I think the businesses in
question are doing this:

1.) The lenders in question are philanthropic organizations, and would take a
PR hit if there's a protacted court battle that puts the borrower out of
businesses. They may be betting that the lenders won't enforce their contracts
(turning out to be a poor bet in retrospect, but many businesses see
philanthropic capital as dumb money).

2.) The court systems are closed. It's going to be many months, possibly
years, before they can actually take possession of the capital.

3.) The business may not believe that they'll be in business in the long term.
If by not paying back a loan, you end up out of business in a year, but by
paying it back you end up out of business in 3 months, you actually do have a
fiduciary duty to not pay it back.

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jamespitts
During the 2008-9 crisis I learned that the failures and responses could be
understood in the context of mass computational problems.

Before a crisis, the system moves along w/o having to fully process
everything; this is because a low-fidelity understanding of value and status
of securities and agreements is sufficient for participants to operate.
However once the crisis has begun, new dire weaknesses and new structures
require much higher fidelity to guarantee safety. The participants find that
there is much more to compute than can be computed in any reasonable
timeframe.

This is why the monster-sized purchasing programs by lenders of last resort
are somewhat effective; the are enabling everyone to function by delaying the
difficult financial computations.

~~~
esoterica
The problem was uncertainty about the inputs, not insufficient computational
power to crunch those inputs. If computational power were the bottleneck there
would have been a mass spike in server purchases and a run on compute
capacity, but clearly there wan't.

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hhs
> What happened next was odd — and symbolic. In the last two months, courts
> have repeatedly frozen Modell’s bankruptcy process, citing the pandemic. The
> company is now a zombie, neither dead nor alive. Its status could soon
> proliferate across corporate America, further confusing the economic
> outlook.

Is there a database on companies that are zombies?

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gpsx
The article talks about how few companies have filed for bankruptcy so far. I
have heard it predicted that companies will wait until businesses are open so
they can liquidate. And, at the same time there would be a race then because
companies would want to be at the start of the liquidation wave.

When I heard this they didn't talk about the difficulty in overwhelming the
courts, which is another interesting factor.

~~~
rdtwo
There is probably some sort of consideration about If you want to get it done
quick or drag it out. If you think you can restructure and bounce back you
want the quick option if you think your want to drag it out you wait till the
last possible moment.

Really though last possible moment is best because it maximizes pain on the
creditor and therefore increases settlement value

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joncrane
This looks like it's paywalled, does someone need to provide a non-paywalled
version for it to stay?

~~~
techdevangelist
Googling the url of the story is typically a god way around most paywalls, in
this case the story seems available over amp:

[https://www.google.com/amp/s/amp.ft.com/content/14b07c0e-95e...](https://www.google.com/amp/s/amp.ft.com/content/14b07c0e-95e3-11ea-
af4b-499244625ac4)

~~~
Sevaris
No need to use something as cancerous as AMP:
[http://archive.is/Da3iS](http://archive.is/Da3iS)

~~~
mindslight
CAPTCHA is less cancerous?

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nrclark
Link is paywalled, and should be removed.

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dannyw
Stock markets: Down just 15% from ATH.

~~~
tomrod
What is ATH?

~~~
jjoonathan
All Time High

