Swamped bankruptcy courts threaten US recovery | Hacker News Reader

Swamped bankruptcy courts threaten US recovery

ft.com

65 pointshhs28 comments

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.

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.

>> 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.

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.

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.

> 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?

Who do you think enforces contracts?

Right right I get you. I just mean unless you believe that your borrower intends to not pay their loan forever do you need to jump to the courts?

Your second paragraph about start-up governments makes me wonder how the court system of the "Republic of Texas" quasi-government [0] (not to be confused with the actual state government) is doing these days. While I doubt they have the resources, the goodwill, or the political capital to replace or supersede the actual Texas state government should the US Federal system collapse, they do fit your description of a start-up government.

0: http://thetexasrepublic.com

There are lots of countries which only gained independence relatively recently. I assume there are still people around who started issuing Estonian passports from an underground government in the eighties when the country was still officially part of Soviet Union. The country's latest innovation has been e-residency which anyone can apply for.

It has been done and it has been a roaring success.

Businesses that participate in this behavior should be forced to sell all or parts of themselves. And I would argue the same should be done for ANY company that needs to borrow money from the government.

Unfortunately governments tend to be mutually excluding and one hell of a moat. The "best" that could be done is bypassing it. Theoretically a banking, contract, and billing system could be unified to prevent those sorts of shenanigans but in practice it is far more likely to be used for more shenanigans instead.

You're in a catch-22. For an entrepreneurial start-up government (which by the way sounds indistinguishable from aristocracy) to happen per any rules you're even remotely used to, you have to have a civil and trustworthy government. Such a government has enough power that it's not going to cede power to any other government.

Any start-up government that poses a real threat to a current government, is by definition a movement of sedition that's attempting an overthrow. There is no possible way to avoid violence with your idea.

The only chance of a non-violent revolution is to use the amendment process of the existing systems, even if that is a completely new constitution (state by state and federal). If the ideas you have are so weak and unpersuasive that you can't convince 3/4's of the country, you definitely have opted for violent revolution.

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.

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.

> 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?

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.

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

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

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...

No need to use something as cancerous as AMP: http://archive.is/Da3iS

CAPTCHA is less cancerous?

Link is paywalled, and should be removed.

Stock markets: Down just 15% from ATH.

What is ATH?

All Time High

Which stock markets are you referring to? I can't see any that are 15% off of all time high though I only checked half a dozen.

Depending on when he checked his data, the S&P 500 was down 15.8% from its ATH of 3386 at 10:15 EDT this morning (2851). It's since dropped a bit today and is now down more like 16.5%.

That 15% is very unequally spread. Many are down 0% and many are down 50%+. The 50%+ crowd are very much in danger of bankruptcy.

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