Archive for October, 2012

Wednesday, October 31st, 2012

Government Backed Battery Maker Files Bankruptcy

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A123 Systems Inc., a car battery manufacturer which received nearly a quarter billion dollars in federal grants, has filed for bankruptcy.  According to a report in the Chicago Tribune, the struggling company was considering a deal which would sell control to a Chinese firm, but ceded to political pressures to file bankruptcy.

There is a growing political frustration with technology companies that the U.S. federal government invested in being sold to China.  The political pressure has gotten so strong that A123 would rather file for Chapter 11 bankruptcy than to allow any more U.S. technology to head overseas to China.

The Chapter 11 bankruptcy is different than many though.  In this instance, there is a prepackaged deal “that would hand over control to Milwaukee-based Johnson Controls Inc. in a transaction valued at $125 million.  China-based Wanxiang, which has its U.S. operations in Elgin, had agreed to invest up to $465 million in A123.

Since Wanxiang’s offer was nearly 5 times that of Johnson’s, it is possible that bondholders in the company will attempt to fight the sale.  Wanxiang has not publicly stated whether or not it is still willing to invest so much more than Johnson, but if they are, the bondholders will have a strong argument to make before the bankruptcy judge.

One analyst sees the acquisition as a great benefit to both Johnson and A123.  Michael Lew, an analyst for Needham and Co. (a New York based firm) was paraphrased as saying that:

“The acquisition is a great fit for Johnson Controls, which also has a battery manufacturing plant in Michigan.  The company would gain big name customers like Fisker, Daimler and GM.  At the same time, technology owned by A123 that helps recharge batteries while cars [are] breaking without stressing the battery could be used to supplement the company’s own battery lines.”

Lew also stated that this is most likely the best chance the U.S. has in establishing a lithium ion industry in the U.S.  And since the emergence of hybrids and battery powered cars is on the rise, it doesn't take much to appreciate how important this industry can be for the future development of green cars.

The success or failure of companies like A123 will be important to determining our energy independence (one of the few things that all politicians can agree on as important).  While it is a positive sign that the U.S. is taking an initiative in creating and keeping a lithium ion battery industry, it is yet to be seen if the investment will pay off.

For A123 specifically, we also seem to have bipartisan support for keeping the company domestic.  “Both sides of the red-blue divide supported the federal infusion, including Gov. Mitch Daniels, a Republican, and Vice President Joseph Biden, a Democrat.”

Hopefully with this much across the aisle support the company will be able to flourish.

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Tuesday, October 30th, 2012

A Victory for Debtors

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Last week the U.S. Court of Appeals, Tenth Circuit  upheld the district court when it arrived at a victory for debtors by disagreeing with the trustee that social security income should be included in the calculation of projected disposable income for people filing for Chapter 13 bankruptcy.

It was noted that "projected disposable income" is defined as "current monthly income" minus the amount needed for the debtor's support in section 1325(b).

This gives people who are receiving social security the option to file for bankruptcy if they need to, without having to include the social security in their projected disposable income.

The second argument was over whether this exclusion would be in 'bad faith' or 'good faith.'

The court stated, "[w]hen a Chapter 13 debtor calculates his repayment plan payments exactly as the Bankruptcy Code and Social Security Act allow him to, and thereby excludes SSI, that exclusion cannot constitute a lack of good faith.”

Several other circuits have the same issue pending and this decision may play an influential role.

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Friday, October 26th, 2012

Boy Scouts Future Financial Trouble?

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The Boy Scouts of America may have to deal with increasing financial difficulties as child abuse allegations evolve.  A recent article in the L.A. Times is reporting that the potential damages in sex abuse lawsuits could be devastating.

The Boy Scouts released 1,200 confidential in-house files on suspected sexual abuse from the past decades.  It is still too early to make an accurate guess on how high settlements and court verdicts might be, but it has the potential to be enormous.

The article likens this case to the claims raised against the Roman Catholic Church over the past several years.

“To settle similar claims in the last decade, dioceses in Roman Catholic Church were forced to file for bankruptcy and sell off property.  The church scandals and [the Jerry Sandusky conviction] have made judges and jurors more sympathetic to allegations of sexual abuse and institutional cover-ups,” the Times reports.

The Boy Scouts have been preparing for legal payouts for a few years now. In 2010, the internal Boy Scouts treasurer reported that pending lawsuits could be covered by its insurance and cash reserves. As of December 2009, the Scouts had nearly $1 billion in assets, with $65 million to pay for settlements and jury awards.

A lot of the variability in the payouts and verdicts will depend on where the suits are filed.  For most types of lawsuits brought against the Boy Scouts for child abuse, the suit will have to abide by the state’s statute of limitations. Each state will have its own statute of limitations.

A statute of limitations is a way to bar a law suit because the cause of the suit happened too long ago. The statute of limitations will differ depending on what the cause of action (or legal reason for the law suit) is.

There are a lot of good rationale for statute of limitations. The main one is probably to avoid prejudice to the defendant. After too long a time period, it becomes increasingly difficult for a defendant to have evidence in their defense.

While statute of limitations are important, they do inherently bar some lawsuits that the plaintiff should recover. If the statute of limitations has run, then it doesn't matter how much evidence the plaintiff has. He or she is prevented from proving their case.

“Geography determines justice. That’s the problem,” said Paul Mones, an Oregon attorney who represented Kerry Lewis.

The Lewis case is the largest recovery against the Boy Scouts to date.  Lewis was a Boy Scout in the 1980's and in 2007 he alleged that the Scouts “failed to protect him and other boys against known molesters, citing detailed evidence from the organizations confidential files.”

In that case, Lewis was able to recover $20 million.

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The European Union is convening to attempt to figure out the budget for the next seven years.  Reuters is reporting that the next two months are going to be made up of “tough bargaining on money, power and the future of governance of the euro zone [which is necessary to] boost confidence that the existential threat to the single currency has faded.”

These talks are going to be crucial for the stability of Greece and the region.

French President Francios Hollande is optimistic that the parties are all on the right track, he stated that:

“We are on track to solve the problems that for too long have been paralyzing the euro zone and made it vulnerable… I again have confirmation that the worst is behind us.”

Greece will be a major factor in the talks for the next few months.  The commission will have to figure out a way to keep Greece afloat.  Of course, that talk will only happen if Greece can reach a deal with international creditors and avoid a bankruptcy.

Some of the problems that the EU has to tackle are flat out staggering.

For example, Spain has been promised up to 100 billion euros in loans to recapitalize its struggling banks.  For context, 100 billion euros is roughly 130 billion USD.

Despite some of these monumental challenges, the euro is looking considerably more stable than it did at its worst.  There were serious concerns about the long term survival of the currency as recently as a few months ago.

While the EU is fighting to work together and find solutions to the crisis, Great Britain is beginning to distance itself from the multinational organization.

Britain, which has never adopted the euro (opting instead to retain the use of pounds), is attempting to loosen its ties with the EU.

Prime Minister David Cameron sees this budget negotiation as a potential for leverage.

The British Prime Minister “has threatened to veto the seven-year EU budget due to be agreed at a November 22-23 summit if spending is not cut.  And he wants to exploit the negotiations on closer euro zone integration as an opportunity to negotiate a looser membership terms for Britain in the Union.”

The fate of the EU and the euro will have effects on the U.S. as well.  With the increasing globalization in international business, hiccups in Europe have more effect on the domestic economy than ever before.

Europe may seem like a million miles away to many people, but we should all be hopeful that the region can emerge from their crisis stronger than before.  For the next few months, all we can do is wait and hope that French President Hollande is correct, and that the worst is behind them.

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Kelly Kraft is a former TV news reporter and spokeswoman for Illinois Governor Pat Quinn.  She is a journalism and political science graduate from Indiana University.  She is also Governor Quinn’s pick to be the executive director of the Illinois Sports Facilities Authority.  Despite her qualifications, Kraft is sparking an intense debate; she also filed for bankruptcy in 2009.

According to reports, when Kraft was working in media relations for the state of Illinois she filed for bankruptcy protection.  Kraft had more than $102,000 in credit card debt.

Governor Quinn is now attempting to put her in charge of a multi-million dollar budget.  Her appointment is opposed by many, most notably, Chicago Mayor Rahm Emanuel.

This leaves Kraft squarely in the middle of a political battle.

Mayor Emanuel has not cited her bankruptcy as a factor for his opposition.  Instead, the mayor claims that Kraft has a lack of experience for such a prestigious position.

“That board and that staff is the thin blue line protecting the taxpayers of the city of Chicago from paying, in case there’s something’s mismanaged… And I think we should find the best-qualified people for that, which is why I- given the board I inherited- replaced them, put in place a whole new board with backgrounds in financial management, and expect the staff to meet that standard.”

According to other reports, Governor Quinn, “has accused Emanuel of ‘character assassination’ against both himself and Kraft, accusing the mayor’s office of leaking information that Kraft declared for personal bankruptcy in 2009.”

While Kraft’s fate is left to the politicians, it does bring an interesting question to the forefront: Should Kraft’s bankruptcy factor into her appointment?

Eric Zorn, journalist for the Chicago Tribune, broaches this topic in a recent opinion article.  His overall assessment? No, her personal finances shouldn't be an indicator on her professional abilities.

“[M]essy personal finances and attentiveness to job duties aren't necessarily or even usually related; that many lives are compartmentalized and bankruptcy shouldn't be held against her,” wrote Zorn.

Zorn has it right.

Many would argue that a personal bankruptcy shows evidence that Zorn is bad with finances and, therefore, shouldn't be trusted with a major state budget.

Without knowing more of the details of her situation, there shouldn't be an automatic presumption that her personal finances are evidence of poor budgeting.  There is no background into why she filed bankruptcy or what factors lead to that decision.

Bankruptcy is a tool available to all of us.  For thousands of Americans a year, bankruptcy is the smartest financial decision they can make.  Kraft made a decision three years ago to file bankruptcy, but she shouldn't be punished now because of it.

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This is a guest blog post written by Danielle Rodabaugh at SuretyBonds.com. The opinions expressed do not necessarily reflect the opinions of TotalBankruptcy.com.

To improve their ability to establish a solid career, some young entrepreneurs have taken on a lot of student loan debt. Starting an enterprise can be stressful enough on its own; doing so while struggling to make ends meet only exacerbates the situation. As a professional who works with new business owners every day, one piece of advice I offer young entrepreneurs is this: if you have student loans, pay them off in full before trying to start a business. Doing so can improve entrepreneurs' financial stability in two key ways.

1. Paying off student loans will take less time and cost less.

It's no secret that new business owners typically don't turn a profit right away. As such, entrepreneurs usually don't have much cash to live on when starting their businesses. Failing to pay student loan bills on time can severely damage an entrepreneur's credit.

Even those who think they could still make student loan payments while starting a business should realize they won't be able to do so quickly. The longer it takes to pay off loans, the more interest accumulates. By fully repaying a student loan within five years (before launching a business), an entrepreneur will pay much less than if that same loan was repaid over a 15-year period.

For example, paying $500/month toward $25,000 in student loans financed at 5% means an entrepreneur will have repaid the loans in four years and 9 months while accumulating $3,092 of interest. However, only paying $200/month toward the same $25,000 in student loans financed at 5% means an entrepreneur will have repaid the loans in 14 years and 9 months while accumulating $10,087 of interest.

2. Starting a business is easier to do with high credit scores.

Financial institutions review business plans, and they consider credit history as an indicator of a person's ability to manage finances. As such, establishing a new enterprise is much easier for entrepreneurs who have a strong credit history under their belt. If student loans have left an entrepreneur with a high debt-to-credit ratio, his or her credit scores will reflect that. To put it simply, without the additional burden of student loans on their shoulders, entrepreneurs have an easier time securing the business credit they’ll need in the future.

Furthermore, many entrepreneurs need to be legally licensed and bonded before they can open for business. Credit issues can affect their ability to qualify for licensing and bonding in certain industries. For example, at least once each week I encounter individuals who wholeheartedly believe they have the experience required to start their own construction company, but their poor financial credentials disqualify them from getting the surety bonds required to work on certain projects. Entrepreneurs must realize that the financial decisions made today can force them into less-than-ideal decisions later on.

Paying off student loans quickly might seem impossible for some young entrepreneurs, but doing so will improve their financial situation immensely as they prepare to start a new business. Although it takes time, the resulting financial stability is worth it.

Danielle Rodabaugh is the director of educational outreach at SuretyBonds.com where she tracks developments within the surety industry. A graduate of the University of Missouri School of Journalism, Danielle has a special interest in entrepreneurship, insurance and finance.

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Thursday, October 18th, 2012

The Generous Baby Boomer

Over the last few years, one group that has come under major financial hardship is the Baby Boomers.

In 2010, 35% of those over 65 in the United States relied almost entirely on Social Security funds alone. Some baby boomers have resorted to filing Chapter 7 bankruptcy.

With nearly 10,000 Baby Boomers entering retirement every day as of January 1st, 2011, the question must be asked: Where is Baby Boomers' money going?


baby boomers being generous

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Adult Children

A significant portion of the Baby Boomers' money goes to their own adult children.

Financial Assistance:

  • 93% of Baby Boomers claim to have offered financial support to their adult children.
  • Almost 3/4 of Baby Boomers (71%) have paid their child's college tuition or student loans.

Housing:

  • 55% of Baby Boomer let their adult children live with them rent-free.

Transportation:

  • 53% of Boomers helped their adult children buy a car.

Parents

As Baby Boomer age, their parents increasingly encounter more varied and costly health challenges.

  • 58% of Boomers help their parents in some financial way.
  • 22% buy their parents' groceries.
  • 15% pay their parents' medical bills.
  • 14% pay their parents' utility bills.

Savings

Baby Boomers are saving less than they should.

  • In 2007, 44% of Baby Boomers claimed they were trying to save money for the future. In 2012, that figure is down to 24%.
  • The percentage of those just trying to maintain what they have is 24%.
  • 68% would rather save than help their child pay off a credit card.
  • 57% would more readily offer long-term car insurance to their parents than save their money.

Retirement

Many Baby Boomers are drawing funds out of their retirement savings to help their adult children or elderly parents.

  • 10% of Boomers admit that helping their parents has negatively impacted their retirement savings.
  • Helping their children has affected 34% of Boomers' retirement planning.

The Baby Boomer's Heart

Despite hits to savings and retirement accounts, Baby Boomers still they they're doing the right thing.

Baby Boomers and their children:

  • Despite losses to savings, 86% would still offer financial assistance to their children if they had the choice to start all over again.
  • 20% of Boomers feel guilty about not being able to offer their adult children more financial assistance.
  • Almost half (47%) of Baby Boomers think their children won't be able to prepare financially for retirement.
  • 35% think their children are financially irresponsible.
  • Over half of Baby Boomers' children (56%) claim they either weren't exposed to budgeting in their youth enough or weren't exposed at all.
  • 52% of Boomers' children say they weren't adequately prepared for retirement planning by their parents.
  • About 30% of Baby Boomers' children believe their parents' attitude toward money was "live for today".
  • Only 11% of Baby Boomers' children believed their parents prepared financially for the unexpected.

This informative infographic was provided by Total Bankruptcy.

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American Eagle, a regional airline off shoot from the parent company of American Airlines, may separate from AMR- American Airlines parent company.

A new report states that AMR is considering separating American Eagle from the company.

When asked about the potential spinoff, American Eagle CEO Dan Garton had this to say:

“That would certainly be my hope and my anticipation… When we again evaluate this, I believe we’ll again determine that it’s the right thing to do.”

AMR had considered separating Eagle from the corporation a year ago, but decided to address it after the company went through bankruptcy.  AMR filed for Chapter 11 bankruptcy in November 2011.

While AMR is in bankruptcy, it is possible that a creditor of AMR could convince the judge to force a sale of Eagle.  The proceeds from the sale could then be disbursed among the creditors.

This is exactly what Tempe, Arizona based US Airways Group Inc has been trying for.  Garton is unable to comment on the extent of US Airways Group’s attempted takeover due to “a nondisclosure agreement signed as part of American’s accord with creditors to review merger options as part of its strategy for leaving court protection.”

Eagle’s role within AMR is mainly to connect smaller cities to larger hubs.  The smaller airplane used to transfer from a minor city into a larger international airport is often an American Eagle plane.

If American Airlines no longer had to rely on Eagle for this, then the airline could try and use other small competitors.  This increase in competition for the first leg of the flights could lead to lower costs from American Airlines, which could allow the company to lower its ticket prices or increase its profit margin.

American Eagle pilots have also recently approved a new labor contract, as have baggage handlers and flight attendants.

With the new contracts in place, AMR is attempting to abrogate any contracts that haven’t been renegotiated.

“We have tentative agreements that now have to be put out for a vote and we are hopeful the members will vote to approve those,” Garton said. “We owe it to everyone in the company that if we can’t come to an agreement consensually, we have to plow on” and attempt to void the existing contracts.

Contracts entered into before a bankruptcy filing can be abrogated during a bankruptcy because those who hold the contracts are viewed as creditors.

When a company, like AMR, enters bankruptcy, one of the main benefits it receives is being able to renegotiate contracts that it would not have been able to perform under.  AMR would not have been able to meet payroll under its current labor contracts, and now the judge will decide if it can void its previous labor contracts.

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Bakers Footwear Group Inc. has filed for bankruptcy after nearly 7 years of losses.

According to an article in the Chicago Tribune, the Saint Louis based shoe store, which currently operates more than 200 shoe stores nationwide, has filed for bankruptcy.

The store has been in trouble for some time now.  The last time it turned an annual profit was the year ending in January 2006.  The sales this year have been similarly low.

The dwindling income has forced the shoe store to default on a $30 million secured credit facility with Crystal Financial LLC.

Secured credit is a loan that has collateral to help give less risk to the lender.  For a retail store, this collateral can be anything from the real property that the store is on (typically called a mortgage) to the products the company sells.  When a company defaults, the lender is able to take possession of the collateral, to help mitigate its losses.

In this case, Crystal lent the money when Bakers was going through a previous bankruptcy.  “The loan requires that Bakers have a bankruptcy restructuring agreement in place by November 2, or begin a process to find a buyer for the chain.”

Bakers currently has only $41.9 million in assets and $59.5 million in debts.

Unfortunately for stock holders, which include Wells Fargo and other investors, the company expects the stocks to be worthless after the bankruptcy.

Stock is a representation of the value of the company.  Each share is a very, very small percentage of the company.  For each share to be worthless, the company must be expecting itself to be worthless.

Bakers currently has nearly a 3/2 debt to asset ratio.  It seems to be an all but certainty that the company will not survive the bankruptcy.

When a company hopes to survive a bankruptcy, it means that the company believes that it can restructure its debts and find a repayment plan that will help it to grow.

If a company cannot survive bankruptcy, it is often liquidated.  When a company is liquidated, it typically auctions off all its assets and uses the money to repay the creditors.

Creditors rarely get anything close to the amount of money that the failed company owed it.  It is not uncommon for creditors to settle for 6 to 8 cents per dollar owed.

This is one of the biggest risks creditors face when they lend money to companies.  When a company goes under, most people involved lose money, and usually a lot of it.

Bakers was founded as Weiss-Kraemer Inc in 1926, and in 1997 merged with another company to become Bakers.  Now it is just another name in the long list of failed companies.

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Author of “Rich Dad, Poor Dad” and financial guru, Robert Kiyosaki, filed for Chapter 7 bankruptcy after a court judgment earlier this year. Rich Global LLC filed corporate bankruptcy after losing almost $24 million to The Learning Annex.

The first of 12 books, and a New York Times best seller, “Rich Dad, Poor Dad” gave financial guidance to millions of people, telling stories of advice received from both (fictitious) rich and poor fathers.

The Learning Annex was one of Kiyosaki’s first backers and helped promote the book by getting him out in front of the public, including on PBS, at the Madison Square Garden and the “Oprah” show.

The New York Post reported that Kiyosaki never paid The Learning Annex their share for putting him on the path that led to his success.

The judge agreed by awarding The Learning Annex $23,687,957.21, which led to the Chapter 7 bankruptcy protection filing for Rich Global LLC. ABC News had Rich Global LLC’s assets valued at $1.8 million.

By filing corporate bankruptcy for one of his companies, Kiyosaki is able to avoid having to file a personal bankruptcy and protect himself, as well as his other businesses that are not tied to Rich Global LLC.

Because Kiyosaki operates other companies, he should be able to stay in business, although not everyone agreed with the advice doled out in his books.

Last week in Forbes, Helaine Olen commented on the tips given out the book,

“tips ran the gamut from ridiculous to illegal and downright hurtful and included advocating for insider trading, arguing for the purchase of multiple real estate properties with little or no money down and telling followers they could purchase stocks on margin via unfunded brokerage accounts."

Regardless of people’s opinions on Kiyosaki’s “Rich Dad, Poor Dad”, this is a business matter and does not come as a surprise to everyone.

Mike Sullivan, who is CEO of another of Kiyosaki’s businesses, Rich Dad Co. told the Daily Mail,

"The dealings we had with the Learning Annex were with a company that hasn't been in business for a number of years. I am not surprised Learning Annex is upset and angry, the money doesn't exist in that company, and we can't bring money out of the group. We got hit for what we think is a completely outlandish figure."

The Chapter 7 bankruptcy filing for Rich Global LLC will not affect the personal assets of the man known as a personal finance guru to many people.

The personal wealth of Robert Kiyosaki is estimated at about $80 million, according to Forbes.

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