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Wednesday, November 11th, 2009

The Year of the Prepackaged Bankruptcy

2009 has seen a dramatic rise in so-called prepackaged bankruptcy filings that streamline the bankruptcy process for large companies, according to a recent report from Reuters.

Companies filing for traditional bankruptcy can find themselves going through several years of Chapter 11 bankruptcy filing, which can interrupt business and create uncertainty.

Instead, in a prepackaged bankruptcy, companies can agree upon and arrange reorganization plans with their creditors before actually filing for Chapter 11 bankruptcy. Creditors have sometimes even voted on the prepackaged plan before it is filed.

The prepackaged bankruptcy is a form of agreement that is even more accelerated than a pre-negotiated bankruptcy in which companies and creditors agree on some but not all stipulations of the plan.

Prepackaged Plans Increase 300 Percent

There have been 30 prepackaged bankruptcies this year, the Reuters report notes—a 300% increase from just 10 such arrangements in 2008. With 164 companies that have public equity and debt who have filed for Chapter 11, the prepackaged bankruptcies represent 18% of the total number filed.

The much-publicized CIT Group Inc bankruptcy was arranged with a prepackaged bankruptcy agreement, as were those of other troubled companies like Six Flags Inc, Charter Communications Inc, Panolam Industries International Inc and Lear Corp. According to Reuters, the 30 prepackaged bankruptcies in 2009 represent some $124 billion in assets.

Fast Filings in Prepackaged Bankruptcy

With the prepackaged bankruptcy, companies can turn around a Chapter 11 filing in a matter of months, even when dealing with a huge company like CIT and its $80 billion in assets, which expects approval of its bankruptcy filing in December, a mere month after filing.

The results are less uncertainty about what the terms of the bankruptcy will be, and less disruption of the business in question.

Six Flags Inc, the world’s largest regional theme park operator, filed for bankruptcy in mid-2009, and continues to negotiate a finalized plan. Robert Rossiter, the Chief Executive of Lear Corp., which makes automotive seats and electronics, recently said in a statement that Lear Corp. had moved through the financial restructuring process without missing a beat operationally.

According to Reuters, the traditional Chapter 11 filing, without a prepackaged bankruptcy, is now often referred to as a free fall.

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Posted in Bankruptcy News and Events | 4 Comments »

Monday, November 9th, 2009

Orlando Shooting Suspect Had Recently Filed Bankruptcy

The suspect in the shooting in Orlando last week that left one dead and six injured had a checkered financial past—including unemployment and a recent bankruptcy filing.

In 2007, suspect Jason Rodriguez was fired from engineering firm Reynolds, Smith & Hills, the location of the shooting, according to The New York Times. According to Rodriguez's public defender, he believed his former employers were blocking his attempts to receive unemployment benefits.

Rodriguez filed Chapter 7 bankruptcy in May, 2009, listing assets of $4,675, mostly from an unreliable 2002 Nissan XTerra, and debts at $89,873.31, including child support, back taxes and student loans.

At the time of his bankruptcy filing, Rodriguez was working at Subway as a "sandwich artist", but recently quit the position due to shortage of hours, according to CNN.

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Posted in Bankruptcy News and Events | 2 Comments »

Monday, November 9th, 2009

How Health Care Affects Filing Bankruptcy

Health care costs and filing bankruptcy rates are more closely related than you might think. Check out this chart that shows the skyrocketing costs of health. These costs could be driving many people to file bankruptcy.

Filing bankruptcy and the influence of medical care costs

Filing bankruptcy and the influence of medical care costs

Skyrocketing health care costs have many people considering filing bankruptcy.

Add this infographic to your site:

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Posted in Bankruptcy and the Economy | 2 Comments »

Saturday, November 7th, 2009

Chapter 7 Bankruptcy Exemptions at Heart of Supreme Court Case

Earlier this week, the U.S. Supreme Court heard arguments in a case that could affect many Americans who seek financial relief from Chapter 7 bankruptcy. Here’s a look at what’s going on.

Background: Chapter 7 Bankruptcy

Chapter 7 bankruptcy (sometimes called liquidation), works by giving debtors a complete discharge of many non-secured debts. Though the debts are forgiven, some filers must sell off some of their property to raise money to pay whatever they can against the debts.

Filers are also entitled to keep specific items of property; these exemptions are determined by state law.

The Case: A Caterer’s Equipment

In the case before the Court…

  • A caterer filed for Chapter 7 bankruptcy. When she filed in 2005, she indicated on her forms that the equipment required to run her catering business was worth $10,718 – exactly the value of property her state permitted in exemptions.
  • An auctioneer valued her equipment. He estimated that her gear was worth closer to $17,000, which would mean she’d have to auction some of it off to repay her creditors.
  • Her trustee never filed an objection. William Schwab, the bankruptcy trustee assigned to the case, failed to file an objection before the deadline. Though he reportedly filed a motion in court to have the caterer sell her equipment to raise $10,718, she countered that, because of the missed deadline, this request was unfounded.

So far, the bankruptcy court and the appellate courts have sided with the caterer here, essentially ruling that, because the trustee did not file his motion in time, it cannot stand.

Possible Implications

It seems the Supreme Court justices have expressed two major concerns:

  • Trustees have insufficient time to review all their cases. This could lead to more oversights like the one in the caterer’s case and could promote bankruptcy fraud among unscrupulous filers.
  • Filers have motivation to undervalue their possessions. Naturally, if there’s a chance your trustee isn’t reviewing your case that carefully, that provides an incentive to underestimate the value of your possessions so you have a chance of keeping more stuff.

Take-Home Lesson

Reports indicate that the caterer who filed for bankruptcy clearly filled out her forms and indicated that she had no exempt property, which suggests that the error of careless oversight may indeed be her trustee’s. If you are filing for Chapter 7 bankruptcy, you may want to speak with a bankruptcy lawyer who can help make sure you take necessary steps to protect yourself and your property when you file.

Additional Resources

Summary of Significant Changes Implemented by BAPCPA in 2005 (PDF)

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Posted in Bankruptcy Courts | 9 Comments »

Thursday, November 5th, 2009

Senate Passes Unemployment Extension Bill

Unemployed Americans will receive up to 20 additional weeks of unemployment benefits under a bill passed by the Senate this week, according to CNN.

The Senate voted 98-0 Wednesday to provide continued relief to the estimated 15 million Americans currently drawing unemployment benefits. The bill provides at least 14 additional weeks of benefits, and 20 weeks in those states where unemployment is 8.5% or greater.

The bill now moves to the House, which passed a similar bill in September providing up to 13 additional weeks of benefits. President Obama has shown support for extending unemployment benefits, and is expected to sign the bill.

In the Senate bill, benefits would be extended to those who exhaust their current benefits before December 31. Those whose benefits have already run out could reapply for additional benefits.

The additional unemployment would be funded by a supplemental unemployment tax on employers that would run through June 30, 2011.

7,000 Unemployed Lose Benefits each Day

CNN reports that 7,000 unemployed workers exhaust their benefits every day. And with just 3 million jobs for 15 million unemployed (a figure that doesn't include under-employed or those who've given up on looking), that rate isn't expected to slow soon—without help.

In September, the unemployment rate reached a 26-year high at 9.8%. October's unemployment rate, due out tomorrow, isn't expected to decline. Most experts expect unemployment to crest above 10% in 2010.

Unemployment and Bankruptcy

Unemployment is also closely tied with the bankruptcy filing rate. Personal bankruptcy filings reached a four-year high in October, with 135,914 consumer filings, according to the American Bankruptcy Institute. That total is the highest since the new bankruptcy law went into effect in October, 2005.

Update: The House passed the Senate's unemployment benefit extension bill Thursday afternoon with a vote of 403-12. President Obama is expected to sign the bill Friday.

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Posted in Bankruptcy and the Economy | 4 Comments »

Wednesday, November 4th, 2009

Layoffs: Johnson & Johnson to Cut 7% of Jobs

Health care giant Johnson & Johnson announced Tuesday that it would eliminate up to 8,000 jobs worldwide, or 7% of its workforce, as a cost-savings measure, according to CNN.

Many of the cuts will come from management levels as the company revises its corporate structure. As a result, Johnson & Johnson expects to save between $800 million and $900 million this year.

Johnson & Johnson manufacturers household health and beauty products, like soaps and mouthwash, along with pharmaceuticals and medical devices. The recession has impacted both sides of J&J's business.

The majority of the job cuts will occur outside of the U.S., according to CEO Bill Weldon, and will occur across all aspects of the business.

Johnson & Johnson's restructuring has been occurring over the past few years, as it attempts to fight off competing drug manufacturers and generic versions of its own drugs. In July, 2008, J&J cut 4% of its workforce. In April, 2009, about 900 U.S. sales jobs were eliminated.

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Posted in Financial Literacy | 4 Comments »

Tuesday, November 3rd, 2009

Commercial Bankruptcy Filings Jump 7% in October

On the heels of bad news for small businesses with the bankruptcy of CIT Group Inc. comes news from The Wall Street Journal that business bankruptcy filings rose 7% in October, after falling for several consecutive months.

A total 7,771 businesses filed for bankruptcy protection in October, up from the 7,271  in September. The increase continues a yearly trend of rising bankruptcies from the same time last year, despite what had been a drop in filings from month-to-month in August and September.

A report from the business information company Equifax Inc. suggests that, from the third quarter of 2008 to the third quarter of 2009, commercial bankruptcy filings among small businesses increased by 44%.

The Wall Street Journal cites the same tight credit market and decreases in consumer demand for products fueling the wider recession as continued causes for businesses going into bankruptcy.

Retail, Real Estate Hardest Hit

Retail businesses and real estate are the industries that continue to lead in bankruptcy filings. The impact of flagging success in these areas, however, can lead to a trickle-down effect with a much broader reach and negative financial impact on industries like home building and manufacturing, according to Georgia State University College of Law bankruptcy professor Jack Williams, who spoke to WSJ.

Bankruptcy filings are a lagging economic indicator so it's likely that we'll see bankruptcy filings increase for the next several quarters, Williams told the journal.

The bankruptcy of CIT Group Inc., one of the largest lenders to small- and medium-sized businesses, will only serve to tighten credit markets, many believe, in an already troubling environment for small businesses. CIT finances a wide array of businesses, from retail operations like Dunkin' Donuts store operators, to energy companies.

In a positive turn, the Equifax report did note that bankruptcy rates seem to be improving in some metropolitan areas like Charlotte, North Carolina, New York-White Plains, and Atlanta, also indicating that the East Coast may be experiencing an earlier recovery from the recession than the West Coast.

According to the report, California continues to be the state hit hardest with bankruptcy filings, with eight of the top 15 metro areas in terms of bankruptcy filings.

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Posted in Bankruptcy News and Events | 4 Comments »

Monday, November 2nd, 2009

Consumer Financial Protection Agency Moves Forward in House

Last week, the House of Representatives Financial Services Committee voted 39-29 for the creation of a federal agency that would provide consumer protection. The proposed agency (called in bills the Consumer Financial Protection Agency) has been in the news since its proposal earlier this year.

This vote is seen as an important step, but the bill must still face votes before the full House of Representatives and the Senate.

Who Wants It, Who Does Not

For the past few months, lobbyists from both sides of the debate have been pushing legislators to make a decision about the potential consumer protection group.

  • A Yea from consumer advocates: Generally speaking, supporters of consumer rights favor the agency's creation. If approved, the agency would regulate certain financial products like mortgages, credit cards and loans, and would provide oversight rules for some banks and lenders.
  • A Nay from big business: Supporters of large businesses and big financial firms oppose the agency, claiming that it would introduce too much government regulation into the business sector, thus hampering trade and profitability.

What The Agency Would and Wouldn't Do

Though many democrats and consumer advocates have reportedly lauded the Financial Services Committee's initial vote, the bill has apparently changed significantly since its introduction by the Obama administration.

Here's a look at what the House has outlined so far for the potential agency:

  • Limited regulatory reach: While the CFPA would be able to regulate certain lenders and issuers of financial products, the Financial Services Committee's version of the bill exempts many groups, such as lawyers, car dealers, cable companies, retailers, accountants and real estate brokers.
  • No state overrides: Though the original version of the bill would have allowed stricter state regulations to trump the national rules, this version does not.
  • Most banks can keep current regulators: Perhaps the most significant change to the bill from its earlier version was one that would allow the vast majority of American banks (about 98 percent, sources estimate) to keep their current regulators for overseeing enforcement of consumer protection laws.

Baby Steps Forward

Though passage of a House committee is only the first step in what may be a long journey, the forward motion of the bill can be viewed as a positive sign for American consumers.

While it's unfortunate that a massive collapse of the real estate industry and stock market was required to incite lawmakers to bolster consumer protections, it's good that they're taking action now.

Additional Resources

H.R.3126 (PDF)

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Posted in Financial Literacy | 10 Comments »

Sunday, November 1st, 2009

Bankruptcy Median Incomes Change Today

Debtors May Have 21 Days to File Under Old Income Levels

The U.S. Trustee Program and Department of Justice announced new bankruptcy median income numbers for the Chapter 7 means test, which affect bankruptcy petitioners who file on or after November 1.

For debtors who income now falls above the new median income, a 21-day grace period may be granted to file under the previous levels. For more information or to begin bankruptcy proceedings to meet the 21-day deadline, connect with a local bankruptcy attorney.

Median Income Tables

One part of the Chapter 7 means test, introduced in the 2005 bankruptcy reform laws, is to compare the income of the debtor with income levels for similar family sizes in the state. In each state (plus Washington, D.C., Puerto Rico and other territories), there is a set median for families of one-to-four people, plus additional levels for families of more than four.

The median income is the middle point of all incomes for each state and family size—half of families will fall above, and half below, the median income. The provision was introduced to help prevent abuse of chapter 7 bankruptcy.

Perhaps a sign of the current recession, with unemployment rising and many workers working below full-time hours, median incomes levels in many cases have fallen. However, income levels have also risen in certain cases. For more information, compare the new median incomes with the previous incomes at the U.S. Trustee web site.

Window to File Bankruptcy Under old Incomes

Under the means test, a debtor compares his income to the median for his state and family size; if his income is below the median, he "passes" that part of the test. Debtors whose incomes are above must look at state exemptions to possibly continue under Chapter 7, or must file under a Chapter 13 debt reorganization plan.

In the rare cases where an income level has lowered (such as a single-earner in Maine, which fell from $40,618 to $38,812) and now excludes a debtor whose income falls in that range, the bankruptcy court allows for a brief 21-day window to "pass" the means test under the previous median income levels.

While most income levels only changed a small amount, for those close to the median, the change could be the difference between a debt discharge under chapter 7 and a 3-to-5 year repayment plan under chapter 13.

For more information on the chapter 7 means test, new median income levels, and if you need to file in the next 3 weeks to qualify for chapter 7 bankruptcy, visit Total Bankruptcy and connect with an attorney about filing bankruptcy.

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Posted in Bankruptcy Filing Requirements, Bankruptcy News and Events | 5 Comments »

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