California Eyes Bankruptcy Route as Means to Stay Afloat as Crisis Worsens
The local governments, including California, have already received the first round of aid from the federal government in efforts to quell the impacts of the coronavirus pandemic. The packages though, come as a form of debt for the local government even as it aims to combat the spread of the deadly disease.
Under the current California bankruptcy law, the state cannot declare bankruptcy even as the situation gets worse by the day. Even so, the Senate led by the republicans is set to propose a change in the current regulations to allow the states to declare bankruptcy if need be.
The state recently spent more than $1.4 billion to purchase masks and other protective gear. This is in addition to billions more already spent in the fight against the pandemic, in what could be a build-up to bankruptcy in the near future.
Despite the aid from the federal government, the state still struggles a great deal in its efforts to combat the disease, with a recession looming due to its impacts on businesses coupled with uncertainty on how it would last.
Several top companies have already sought bankruptcy protection under California laws, with several more still considering the same route if the current situation persists further.
Modifying the bankruptcy code to allow the local governments to declare bankruptcy, however, would be a significant lift in Congress, despite being the best way in which the federal government would be able to avoid having to borrow from future generations.
California is among the top states that support the use of state bankruptcy to cushion it from economic downfalls rather than relying on aid from the federal government.
If the current laws are modified to allow the state to declare bankruptcy, it would be able to induce bankruptcy protection on its assets and channel the much-required aid to the most vulnerable sectors of the economy.
Among those set to benefit from the new development are small businesses and individuals, who would find it easier to declare for bankruptcy under the Chapter 11 debt reorganization arrangement. Even more, the state will be able to reorganize its debts to enable it to channel more resources towards combating the deadly COVID-19 pandemic.