Archive for March, 2012

Forbes reported this week that Sprint shares plummeted after one analyst gave the company a less-than-rosy financial rating and noted that he believed it has a 50 percent chance of filing for Chapter 11 bankruptcy protection.

But here’s the kicker: Sprint’s financial fate is closely tied to the predictions and analyses issued about its future. After an analyst downgraded Sprint’s stock status, its share price dropped from $2.50 to $1.75, illustrating how quickly investor expectations can become reality.

Of course, Sprint is facing legitimate challenges to its business model, and would likely have suffered a decrease in its stock price eventually, even without the analyst’s comments. But the plummeting stock price won’t do the company any favors as it tries to get back on its feet. Here’s how your finances are more or less the same.

The Predictive Power of Your Credit Rating

The individual equivalent of Sprint’s public rating is the credit report and credit score. When you have a low credit score…

  • You’re seen as a “bad risk” by lenders. Because of this, they are less willing to extend you loans. Those loans you are able to secure will come with higher interest rates than they would if you were deemed a “good risk.”
  • You pay more to borrow. Over the course of the repayment of your loans (which may come in the form of a credit card, a mortgage, a car loan, etc.), you will end up paying more in interest than someone who had stronger credit than you.
  • You have less money. More of your money goes toward loan payments and less of it goes toward savings and paying down other debts. The more debt you have and the less you have saved, the more your credit score will suffer, meaning that it will continue to be difficult for you to get attractive loans.

Of course, the opposite is also true: if you secure a good credit rating, you will qualify for loans with lower interest rates, leaving more of your money available to pay down debts, save, and generally improve your credit worthiness.

Break the Debt Cycle & Build Stronger Credit

There’s no fast way to build stronger credit. Negative credit actions (including foreclosures and bankruptcy filings) remain on your credit report until their statutes of limitations expire.

But while the process isn’t fast, it is fairly simple. The easiest way to improve your credit rating is to ensure that you pay all your bills on time. Set up a plan for paying down debt, save money, and eventually the positive actions on your credit report will start outweighing the negative ones.

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Here’s an inspirational story for anyone who has filed for bankruptcy and felt overwhelmed by the burden of their debt.

Resurrected NFL star Michael Vick has bounced back from a prison sentence and a Chapter 11 bankruptcy case that included $18.97 million in debts owed to creditors. At present, according to TMZ.com, he owes less than $400,000 to creditors. (To put that in perspective, Vick earned about $11 million in his most recent season playing for the Philadelphia Eagles.)

While Vick’s debts and earnings are well beyond what most of us manage to accrue, his attitude toward bankruptcy and success in powering through provide useful insight about what it takes to get past a personal bankruptcy filing.

Beat Bankruptcy the Michael Vick Way

Follow the NFL star’s path out of bankruptcy to make your own comeback after debt has gotten you down:

  • Keep bankruptcy in perspective. Michael Vick filed his Chapter 11 bankruptcy case in 2008, when a conviction on dog fighting charges landed him in jail. At the time, he was viewed as a disgraced star whose career was cut tragically short. But he came out of jail ready to rejoin the NFL, and has, since 2009, proven himself an indispensable part of the Eagles squad. The lesson here is that, while bankruptcy may feel like a huge dead end, it really is a new beginning for most people. While going through bankruptcy has negative effects on your credit in the short term, it also provides you an escape to a debt-free life—if you’re willing to do the hard work necessary to live that life.
  • Make slow and steady progress. Whether you file under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code, your progress to your new life will not be fast. You’ll have to repay your debts (in Chapter 13) and/or make some serious changes to your lifestyle. But it’s essential to believe in the long-term power of saving a little bit of money at a time, of paying down debts as they come, and of sticking to your budget to prevent yourself from getting in to unmanageable debt.
  • Change the way you do things. Unless you land a killer new job after bankruptcy (as Vick was lucky enough to do), chances are you’ll have to adjust your lifestyle to your new budget, particularly if you’re making payments on a Chapter 13 repayment plan. But making small changes to your everyday habits can add up to big savings in the long term, and will ultimately keep you out of debt (and bankruptcy court) in the future.
  • Build a new life. Don’t think of bankruptcy as a failure. Think of it as a wakeup call. You can thrive in your life after bankruptcy, and if you seize the opportunity of a financial fresh start that your bankruptcy discharge provides you, you likely won’t have any trouble doing so.

The much-publicized American Airlines bankruptcy case got more press last week when the company announced changes to plans it had published to terminate pensions for current and future retirees as part of bankruptcy cost-cutting measures.

Now, it seems, American will only freeze the pensions, and the freeze (at present) will only apply to ground crew members and flight attendants (pilots’ pensions will be handled differently; see below).

Employees whose pensions are frozen will not be eligible to receive additional benefits beyond what they have currently earned; however, they can expect to collect pensions when they retire, up to the amount they currently qualify for.

A Delicate Financial Game

The details of the pension negotiations demonstrate just how tricky a corporate bankruptcy case can be. Here’s a look at what’s going on behind the scenes as American attempts to figure out how to handle the pensions of its pilots.

  • Before the bankruptcy, pilots for American (who received the largest pensions of all employees) had the choice of taking their pension payments over the course of their retirement or of taking an initial lump-sum payment, then collecting smaller payments during the course of their retirement.
  • Prior to announcing the pension freeze, American apparently had plans to hand over the pension matter to a federal government agency, which would have likely instituted stricter limits on the amount of pay pilots could receive each year (at present, pilots who retire at 65 can earn $54,000 per year in retirement; older retiring pilots can earn more).
  • In bankruptcy, American is hoping to eliminate the option for pilots to receive a lump-sum payment. The company is worried that pilots would retire en masse to collect their lump payments in a hedge against further financial problems that would lead to a government takeover (and smaller lump payments). American, it seems, is worried that it would lose so many pilots to retirement that it would be unable to continue flying planes.
  • As many as a third of the pilots currently working at American would apparently earn less from their pensions if the federal government takes over payments.

As American’s bankruptcy negotiations play out, pilots and executives alike are attempting to hedge their bets to maximize their benefits. According to the Washington Post, however, American at present does not have enough money set aside to cover pensions as they now stand.

A failure to put enough money aside over the years led to the current shortfall, and unless the company is able to find additional money to transfer to pension funds during the bankruptcy reorganization, the future of employees’ pension payments remain hazy.

A Westport, Connecticut, man has been sentenced to 30 months in jail for bankruptcy fraud crimes of nearly $1 million. Following his time behind bars, Daniel Steinberg will remain under the court’s supervision for three years, according to the Westport Patch.

Here’s a look at Steinberg’s crime and how fraud works in bankruptcy court.

Unauthorized Transfers

The fraud reportedly involved the business bankruptcy case of Reservoir Corporate Group, LLC, which filed a Chapter 11 case in 2009. Over the course of a year during the company’s bankruptcy, it seems that Steinberg transferred more than $700,000 from the company’s coffers to his own.

That money was apparently used to fund personal expenses as well as those of other businesses that Steinberg had a financial stake in. Because part of the Chapter 11 bankruptcy required that Steinberg, as debtor-in-possession of the company, file reports with the bankruptcy court, he also falsified the financial records of the company to cover up his fraudulent activity.

In August 2010, the bankruptcy court discovered Steinberg’s illegal transfers, and also found out that he had begun making such transfers before the company officially filed for bankruptcy.

protection. All told, it seems Steinberg embezzled $968,973 from the company.

Bankruptcy Court Takeover

Once evidence of Steinberg’s fraud came to light, a Chapter 11 bankruptcy trustee took over control of the accounts in question. In addition to his jail time, Steinberg has been ordered to pay full restitution for the funds he embezzled, which might be difficult for someone who was shuffling money from a company in bankruptcy in order to cover his expenses.

But the penalties in Steinberg’s case are not unusual. In personal bankruptcy cases (Chapter 7 or Chapter 13), bankruptcy fraud can lead to penalties that include:

  • Fines of up to $500,000, which usually align with the amount of money or value of property involved in the fraudulent transactions; and
  • Up to five years in prison.

Because bankruptcy is handled at the federal level, bankruptcy fraud is a federal offense. While Steinberg’s case represents a blatant flouting of the rules of bankruptcy court, not all bankruptcy fraud is so glaringly obvious.

One reason the U.S. Court system recommends that individual bankruptcy filers work with an attorney is so that they can avoid accidental fraudulent behavior. In many cases, transferring ownership of property to a friend or family member in the months immediately preceding a bankruptcy filing can be construed as fraudulent by the bankruptcy court.

If you have questions regarding the potentially fraudulent appearance of your plans for a personal bankruptcy case, be sure to consult with a bankruptcy lawyer who practices in your state.

An ABC news interview with former federal bankruptcy judge Arthur J. Gonzalez, who oversaw the bankruptcy case of Chrysler, sheds new light on the role bankruptcy played for the big automaker. According to Gonzalez, the bankruptcy filing was essential to Chrysler’s economic recovery, and without it, the automaker would have not been able to continue operations.

Here’s a look at what affect that assessment might have.

Bankruptcy: A Hot Election Topic

One potential effect of Gonzalez’s comments is that they’ll impact the rhetoric Republican presidential candidates are hurtling on the campaign trail. Here’s why:

  • Under Presidents Bush and Obama, Chrysler received $12.5 billion in federal loans. At present, Chrysler has repaid all but $1.3 billion of those taxpayer dollars.
  • In addition to bailout money from the federal government, Chrysler filed for Chapter 11 bankruptcy protection to help ease the unmanageable debt burdens it had connected to pension plans for the auto workers’ union, among other expenses.
  • Chrysler has, since filing its bankruptcy case, emerged from the court’s protection. Last quarter, the car company posted earnings of $225 million, indicating that it is once again profitable.
  • Republican presidential candidates, who generally argue for smaller government and less government intervention in the private sector, have largely criticized the federal dollars that were loaned to Chrysler and the other automakers. On the campaign trail, many candidates have noted that the car companies should have gone through bankruptcy without help from the federal government.
  • In his interview with ABC news, however, Gonzalez made clear that Chrysler had no funding alternatives to the federal government at the time that it received its cash infusion. In other words, no other lenders were willing to extend Chrysler credit to help it get back on its feet.

Today, Chrysler and the other Big Three automakers are once again profitable. If we are to believe Gonzalez, that profitability is thanks in large part to the bailout money provided by the federal government.

Because the carmakers are once again selling vehicles and turning a profit, the millions of Americans they employ still have their jobs. While this may seem like a boon for President Obama, under whom some of the bailout funds were dispersed, it will likely prove difficult to convince voters that any action “prevented” the loss of a job.

Much more dramatic (and visible) are the actions that directly eliminate or directly restore jobs.

Of course, Gonzalez’s claim that Chrysler would have been forced to liquidate (i.e. sell off its assets and close up shop) without help from Uncle Sam will likely be questioned, ridiculed, and dismissed by those who disagreed with the bailouts, even as it is heralded as gospel by those who supported them.

In an unusual business bankruptcy case, a bankruptcy trustee has brought a civil lawsuit against the former owner of a company that was forced into bankruptcy protection after the collapse of the Ponzi scheme-style scam it had been running for several years.

Fair Finance Co. Bankruptcy Case Background

The case involves the bankruptcy of Fair Finance Co., based in Ohio, which, according to sources, defrauded investors between 2002 and 2009 by pretending to offer them consumer loans. In actuality, according to a March 2011 statement released by the Securities and Exchange Commission, the owners of Fair Finance Co. used much of the money they took in to fund other unprofitable companies, purchase luxury goods for themselves, funnel money to family members, and finance home purchases.

The SEC notes that the scheme involved more than 5,200 investors and took in roughly $230 million, which accounted for about 90 percent of the company’s total loan portfolio. At the time of the SEC investigation, three men at the company’s helm faced a dozen felony charges related to their misuse of consumer funds.

A Civil Suit in Bankruptcy Court

Just this week, though, another wrinkle emerged in the Fair Finance case, which went to bankruptcy court as part of efforts to recover the misused funds taken from consumers. Here’s what happened:

  • The trustee overseeing the bankruptcy case brought charges against Donald Fair, who sold Fair Finance Co. in 2002 to the three men charged by the SEC.
  • According to sources, the trustee has accused Fair of failing to blow the whistle on the fraudulent activities the three men carried out under the guise of providing consumer loans.
  • Though Fair sold the business in 2002, he was apparently supposed to remain on board as chairman emeritus of the company’s board for five years following his departure. However, he reportedly stepped down late in 2002.
  • Because he allowed his name to remain on documents distributed by the company, the bankruptcy trustee has argued, Fair was responsible in part for the actions its new owners took.
  • The charges against Fair are civil (not criminal), and request that he pay the court $150 million for his failure to act to prevent the fraudulent activity.

Sources report that Fair’s lawyer has called the charges against Fair absurd, claiming that he had no knowledge of how the business was being run after his departure. Despite this claim, it seems that Fair is in the process of negotiating with the trustee on a settlement figure.

Before leaving Fair Finance Co. in 2002, Fair worked there for 56 years, establishing the outfit as a dependable source of consumer loans. This long-standing reputation apparently kept victims of the scam from suspecting anything illegal for several years.