How to deal with debts in a pandemic

What to do about the billions of dollars of non-payroll liabilities that can't or shouldn't be paid? In normal times, companies file for bankruptcy protection when they can't pay their debts — but these aren't normal times.

The big picture: The costs of bankruptcy are enormous. It is a huge burden on the court system, it can last for years, and it tends to destroy institutional capital. Few companies come out of it unscathed, with a motivated and largely intact workforce.

Nobel economics laureate Joe Stiglitz has long been a proponent of what he calls "Super Chapter 11," which would be implemented in times of crisis, when a large number of companies are defaulting on their debts at the same time.

• His metaphor: If a student fails an exam, that's probably her fault. If 70% of the class fails an exam, that's probably the teacher's fault. In that case, you don't start from the assumption that the student did something wrong and deserves some kind of terrible consequence.

How it works: Under Super Chapter 11, there would be a strong presumption that companies would continue to operate with their existing workforce and their existing management. Then there's a quick-and-dirty formula — "rough justice," Stiglitz calls it.

• The top claimants are wage earners: Keep paying employees.
• Then come suppliers, followed by tax obligations. (Normally, tax liens always come first.)
• Bank lenders and bondholders receive nothing until the company is profitable.

• Shareholders are mostly wiped out, but receive warrants which allow them to start making some money if the company achieves its pre-crisis valuation.

Of note: Toys R Us would still be going if Super Chapter 11 had been an option.

• Between the lines: In times of full employment, it might be OK for such companies to go under. But society as a whole can't afford to see thousands of retailers closing permanently because of the crisis.

The bottom line: In times of global crisis, the normal financial architecture needs to be reworked. Some creditor protections are lost, but the gains for workers, citizens and corporate continuity make that a worthwhile bargain.

Go deeper: JCPenny weighing bankruptcy amid strategies to deal with coronavirus