The coronavirus has taken a heavy toll on most businesses, but it has been especially hard on small businesses. Should those businesses file for bankruptcy, and what will happen to them if they do? In this episode, Kate Waldock and Luigi Zingales explain how bankruptcy works—or doesn’t work—for small businesses and how the system needs to change.

The Covid-19 crisis has been brutal for American businesses, particularly for small businesses. And even though states are starting to ease restrictions and the US economy is beginning to reopen, millions of small businesses are still expected to face bankruptcy in the next few months. 

But should struggling small businesses file bankruptcy, and what will happen if they do? Will they come to see bankruptcy, as one Fortune article put it, as a “devastating trap”?

In the latest episode of Capitalisn’t, Kate Waldock (Georgetown University) and Luigi Zingales (University of Chicago) explain how bankruptcy works—or doesn’t work—for small businesses and how the system needs to change.

If you liked the episode, here is a reading list of some of the papers and articles discussed during the episode, as well as some other sources on small businesses and bankruptcies. 

—First, a working paper by Kate Waldock on the typology of US corporate bankruptcy. 

—These two papers by Columbia Law School’s Edward Morrison are also worth checking out:

Bankruptcy’s Rarity: An Essay on Small Business Bankruptcy in the United States

Bankruptcy Decision Making: An Empirical Study of Continuation Bias in Small‐Business Bankruptcies

—A recent brief by the American Bar Association finds that the Small Business Reorganization Act “lowers costs and streamlines the plan confirmation process to better enable small businesses to survive bankruptcy and retain control of its operations.”

—From Brook Gotberg (University of Missouri-Columbia) and Paige Marta Skiba (Vanderbilt University): “What do struggling small businesses need most? Time–and bankruptcy can provide it.”

—This letter to Congress by a bankruptcy & Covid-19 working group states that “our bankruptcy system, if properly staffed, will be capable of managing the financial distress that the pandemic  as created for large corporations,” yet calls Congress to “add capacity to the bankruptcy system to prepare for what we fear could be a flood of large corporate bankruptcies arising out of this pandemic.”

—“COVID-19: When a bank loan restructure may not be a troubled debt restructuring