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Wednesday, February 8th, 2012

More than $500K in Debt, Bookstore Chooses Bankruptcy

An Atlanta-area bookstore surprised its fans last week when it filed for Chapter 7 bankruptcy protection to deal with its $508,673 in debts. At the time of the filing, it seems, Outwrite Bookstore had less than $300 in its checking account, a circumstance that underscored the dire financial straits the bookstore found itself in.

Part of a Larger Trend

While Outwrite’s Chapter 7 filing in particular came as a surprise (the bookstore had admitted financial troubles in recent months, but had apparently held a fundraiser to help with relocation costs even as it was paying a bankruptcy lawyer to help it draw up plans for winding down), its place in the grand scheme of booksellers these days is nothing new.

With online giants like Amazon underselling most of its competition, many independent (and even not-so-independent, ahem, Borders) brick-and-mortar sellers have felt a serious strain.

Individual Chapter 7 vs. Business Chapter 7

When Outwrite filed its Chapter 7 petition, the bookstore cited only $78,311 in assets, compared with its debts exceeding $500,000. Most of those assets, it seems, took the form of office supplies and inventory the store still had on hand.

It’s not entirely uncommon to see individual Chapter 7 bankruptcy cases with similar disparities in debt and assets. Here’s why Chapter 7 bankruptcy tends to work well for those with few assets to their name:

  • Chapter 7 bankruptcy offers a full discharge of certain debts, meaning that filers are not required to repay those debts. For a business like Outwrite, choosing Chapter 7 makes sense when there’s no clear way to earn the money needed to repay creditors. For individuals, Chapter 7 can provide relief from debts that are unrealistically higher than a filer’s income (such as exorbitant medical bills or credit card debts).
  • Filers can keep their necessities. Chapter 7 bankruptcy is a form of protection, not punishment. Filers are granted several “exemptions,” which outline property a filer can keep in order to make a fresh financial start after the bankruptcy case is finished. Any property or assets that the court deems unnecessary to reasonably make a living may be sold in a liquidation sale.
  • Chapter 7 offers relief from creditors. Chapter 7 filers enjoy the legal protection of the automatic stay during their bankruptcy cases. This stay prevents creditors from taking any collection actions against them. Once a debt is discharged in bankruptcy, creditors have no legal claim to it, and cannot rightly take collection action.
  • Chapter 7 moves quickly. In a matter of months, filers can complete the bankruptcy process and restart their lives uninhibited by the debts of their past. In their lives after bankruptcy, filers are free to rebuild their wealth.
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Wednesday, December 28th, 2011

How the MF Global Bankruptcy Is Affecting Charities

Since MF Global filed for bankruptcy protection at the end of October, much of the media attention has been focused on the scandal of the $1.2 billion in investor money that the firm cannot account for. That money, which reportedly belongs to about 38,000 investors, may have been used for MF Global’s own (questionable) investments in European debt.

But now, as the end-of-year charity giving season is in its final throes, another kind of fallout from the MF Global bankruptcy is coming to light: its effect on charity donations. According to sources, the country’s eighth-largest bankruptcy is likely to affect charity giving in a number of ways:

  • Individual donors who invested with MF Global and lost money (when the firm misplaced those funds) may be less likely to contribute to charities than they were in recent years. Because many smaller investors lost significant amounts of money (relative to their total net worth), tens of thousands of potential charity donations might have been wiped out by MF Global’s collapse.
  • Corporate charity organized by the CME Group will likely not occur. In years past, sources note, the CME Group kept a trust (called the CME Trust) of $50 million to compensate investors who were unfortunately hooked into (and who lost money by) fraudulent investment schemes. In the past, most of that money got donated to charities at year’s end; this year, however, the entire trust went toward compensation of MF Global investors who lost money.
  • Some charities invested money with MF Global. In addition to the individual clients who lost money, organizations (including nonprofits and charities) put their money with this firm, as it was meant to be a relatively safe investment option. Now the firm’s bankruptcy will translate to a direct loss of funds for charity investors.

Investors & Charitable Grants

It’s no secret that the wealthiest citizens of the U.S. are often the ones behind major charitable grants and donations. But few news sources have discussed the potential effect a major bankruptcy like MF Global’s, which includes debts of more than $39 billion, is likely to have on charitable organizations this year.

What is perhaps even more troubling is that this blow to charities comes during a time when individual donors have cut back on charitable contributions because of unemployment and reduced wages. Naturally, the persistently tough economy also means that more Americans than ever are in need of the support that charitable organizations traditionally offer.

In recent years, the CME Trust donated millions of dollars to Chicago-area educational institutions, including universities, charter schools, and organizations that fund education in the city. Without such donations, those and other groups could face significant financial difficulties in 2012.

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Wednesday, December 21st, 2011

Insider Knowledge of Missing Money in MF Global’s Bankruptcy

Reports from the Christian Science Monitor indicate that former New Jersey Governor and CEO of MF Global Jon Corzine may have known about the use of client money in a loan to one of the company’s European partners.

The report is just the latest in the saga in MF Global’s bankruptcy case, which it filed on October 31, 2011. At the time of the filing, Corzine allegedly claimed that he had been unaware of the missing customer money until the day before the firm entered bankruptcy protection.

The new information (from sources including an executive from the Chicago Mercantile Exchange (CME)), however, suggests that Corzine might have known about the misuse of client funds much earlier. Given the questionable circumstances surrounding the case, Corzine and others involved could face criminal charges for their involvement in the trades.

Brokerage Firms, Client Money, and Bankruptcy

So what does the disappearance of $1.2 billion in client money mean? Here’s a breakdown of how MF Global operated and what the various facets of its bankruptcy might mean:

  • MF Global, before its bankruptcy filing, was a brokerage firm. It traded client money (as well as its own funds) on CME exchanges.
  • During his tenure as CEO (March 2010 to November 2011), Corzine attempted to convert MF Global into a full investment bank. As such, the company would have been able to engage in more types of financial transactions. As a brokerage firm, MF Global only managed transactions between buyers and sellers of various derivatives. In theory, the company might have been able to pull in greater profits as an investment bank.
  • Legally, brokerage firms and other investment institutions are not permitted to use client money for company expenses. In other words, MF Global could invest its own funds but could not dip into client accounts—for precisely the reason that a bad bet could translate to the disappearance of such money.
  • MF Global apparently broke that rule (and possibly the law), by investing client funds in questionable places.
  • Because of heavy losses linked to investments in European debt, MF Global filed for bankruptcy protection in late October. As its financial standing became a matter of public record, it became clear that the firm lost client money on ill-advised investments.

At present, it isn’t clear how the bankruptcy judge and trustee overseeing the MF Global case will handle the problem of the missing funds. In this situation, clients who invested with MF Global are among the firm’s bankruptcy creditors and as such will lose money if MF Global’s debts are discharged by the bankruptcy court.

The bankruptcy court will rule on how money will change hands regarding this incident. If investigators have reason to believe that insiders at MF Global broke the law (in addition to the rules that regulate brokerage firms), the Justice Department may try Corzine and others in criminal court.

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Posted in Economic News: How Are We Doing?, Year in Bankruptcy | 1 Comment »

Tuesday, December 13th, 2011

How the Bankruptcy Double Standard Hurts Consumers

A recent article from The New Yorker highlights a troubling disparity in the way we view bankruptcy and loan restructuring in general in this country. As was evidenced in the recent bankruptcy filing of American Airlines, bankruptcy for corporate entities is generally considered part of an overall savvy approach to managing debts and investments.

While American could have continued paying its debts (it filed bankruptcy with more than $4 billion in the bank), it opted to take the bankruptcy route, which will allow it to restructure its debts into ones that make more financial sense. After the company filed its Chapter 11 bankruptcy petition, most analysts praised its decision, citing the success other airlines have had with reorganization bankruptcies in recent years.

For consumers interested in filing personal bankruptcy, though, the attitude of the general public is vastly different.

Bankruptcy as a Moral Issue

The current turmoil in the housing market highlights exactly how differently the general public views personal bankruptcy:

  • The housing bubble falsely inflated housing prices. Arguably, the analysts and economists who were equipped to recognize this bubble for what it was and attempt to prevent its burst did not. Also arguably, consumers might have recognized the bubble but were less likely to do so than those trained in economic fields.
  • Lenders and homebuyers took on risky debts, betting on rising home prices to pay them off. We now know that those debts were not so good.
  • Many banks lost millions or billions of dollars on bad home loans. Some of those banks benefitted from taxpayer-funded bailouts. Others have staunchly refused to refinance (on a significant scale) mortgage loans that have become untenable for their borrowers.
  • Many homeowners are underwater on their homes. Sources note that many Americans owe up to 50 percent more than their home’s value on their loan. The “smart move” financially for these people would be to walk away from their mortgage, to abandon their homes and stop paying their mortgages. Most don’t, though.

One of the major reasons more homeowners aren’t walking away from their unaffordable homes, even when such a move would be financially logical, is that nonpayment of loans has been morally stigmatized in the media.

Figures including the head of the Mortgage Banker’s Association have reportedly noted that defaults on home loans “send the wrong messages” to community and family members. Others have hinted that we would do well to bring back debtors’ prisons. The total effect, in other words, is that personal bankruptcy and similar moves (even when they’re financially savvy) have been labeled as morally deleterious.

The New Yorker article summarizes the problem in its closing paragraphs, noting that the prevailing attitude in the U.S. runs that individuals ought to “do the right thing” by honoring their debts, but that large businesses, banks, and corporations—who usually have much more capital at their disposal—can do whatever earns them the greatest profits.

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Friday, December 9th, 2011

German Bankruptcy Support Group Thrives

Attila van Unruh, a serial entrepreneur living in Germany, has found his latest business success from an unlikely source: bankruptcy. According to the English version of the German paper Deutsche Welle, van Unruh came to his latest venture after having to declare bankruptcy because of an employee’s mismanagement of funds in one of the businesses he’d started.

At the time he filed for bankruptcy, van Unruh had opened an airline extension, a catering business, and a restaurant chain. Perhaps unsurprisingly, he saw his experience in bankruptcy as a way to help others—and started another business.

Harsher Bankruptcy Penalties in Germany

We’ve often remarked that American bankruptcy protection is an integral part of the fabric of our culture—our bankruptcy laws are relatively lenient, compared to those of many other countries, and as such encourage greater business risk-taking than in other parts of the world.

In Germany, however, those who file for bankruptcy may not be able to rent an apartment, get a cell phone contract, or conduct other essential business of everyday life for several years following their petition. The German bankruptcy process lasts six years, compared to as little as six months in the U.S.

When he entered bankruptcy protection, van Unruh discovered those depressing and discouraging realities firsthand—and he decided to do something about them.

He launched the group Insolvents Anonymous, which, since its inception, has:

  • Provided those in bankruptcy a forum to discuss their fears, frustrations, and experiences.
  • Established a network of counselors to help business owners with financial, personal, and emotional matters relating to bankruptcy.
  • Expanded to harness the knowledge of the thousands of entrepreneurs who have benefited from its services to provide essential information to other business owners and prevent future bankruptcies.
  • Spread to 10 German cities and parts of Austria. The group has reportedly helped at least 5,000 entrepreneurs already.

The Push for Bankruptcy Law Reform

It seems that van Unruh’s timing in creating Insolvents Anonymous was just right: as the economic crisis worsened, his group expanded and became relevant to more Germans and Austrians than in the past.

At present, van Unruh has apparently secured sponsors for his services and is pushing for a modification in Germany’s bankruptcy laws so that they more closely resemble those in the U.K. or France. One major point he’d like to see addressed? The waiting period before starting new business ventures.

After six years of bankruptcy, German filers must wait three additional years before starting a new business, a restriction that could hamper a filer’s ability to recover financially from bankruptcy.

Whether or not van Unruh succeeds remains to be seen, but his outlook, in some ways, seems rosy: much of Insolvents Anonymous’ current funding comes from “graduates” of the program who have gotten back on their feet and are able to give back to the group. This alone suggests that van Unruh is on to another winning proposition.

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Tuesday, November 29th, 2011

USPS Keeps Batting Back Bankruptcy

The U.S. Postal Service announced recently that, in an effort to avoid filing for bankruptcy, it will raise prices on its most popular services (priority and express mail), as well as on standard first class stamps (up to 45 cents each starting January 22, 2012).

The USPS debt problems highlight some important differences between bankruptcy filings for individuals and businesses. Here’s a look at what you can learn from the USPS and why you may be in a better position if you’re interested in avoiding a bankruptcy filing of your own.

Shedding Expensive Baggage

When individuals see their debt spiraling out of control, they can usually take at least some meaningful action to reduce the total amount they owe – or at least to stop the ever-increasing financial burden they carry.

But because of the oversight Congress provides to the USPS, the nation’s postal system isn’t quite as free to slough off its highest costs. For example:

  • Underperforming post offices: To save money, the USPS has proposed shutting down post offices that don’t earn sufficient profit to merit staying open. In other words, the USPS wants to operate like an ordinary business or individual, eliminating its branches that cost money to operate but don’t bring in enough in return. However, Congress must approve any such shut-downs, and it has not yet ruled on USPS closures.
  • Six-day delivery: Like extra cable channels or a too-expensive car lease for individuals, six-day delivery has been cited as one of the major expenses dragging down USPS finances. While officials from the Postal Service hope to cut home delivery to five days per week, they have not yet received the okay from Congress, and so are unable to take this cost-saving step.
  • Expensive healthcare and pensions: When municipalities file for bankruptcy, one of the main debt-cutting measures available to them is the re-negotiation of contracts with workers. In many cases, municipalities are able to save serious money by cutting benefits they pay out in pensions, healthcare, and other benefits. But the USPS has not yet been able to make such negotiations with its workers, again because of inaction in Congress.

Not Enough to Prevent Bankruptcy?

The Postal Service’s rate increases, set to take place in late January, could increase its income substantially, but many analysts predict that price hikes alone will not allow the USPS to avoid bankruptcy.

Without action from Congress allowing it to make meaningful cuts in its current services, the USPS has claimed that it could need bankruptcy protection as early as next September. If the USPS is allowed to reorganize (either in bankruptcy or without its help), the business has a decent chance of succeeding: its competitors FedEx and UPS have reportedly both achieved modest growth even during the economic downturn.

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Tuesday, November 22nd, 2011

American’s Airlines Parent Company Closer to Bankruptcy?

Bloomberg Businessweek reports this week that American Airlines’ parent company, AMR, may be edging closer to a bankruptcy filing. The assessment came on the day of AMR’s final board meeting of 2011, an occasion on which members were forced to acknowledge four consecutive years of losses.

Of the problems plaguing American Airlines, perhaps the most prominent is its high labor costs. At present, AMR has not been able to renegotiate its contract with pilots; the Allied Pilot Association has apparently not yet voted on a contract proposed by the airline.

While spokespeople from AMR have reported that bankruptcy is neither the company’s first choice nor its preference, indicators suggest that it might be inevitable if circumstances don’t significantly change in the next few months.

To date, AMR has access to $4.3 billion in cash and available investments. The total may sound like a lot, but considering the size of American Airlines and the cost of its day-to-day operations, many analysts are predicting that the pile won’t last much beyond six to nine months.

In fact, one ratings analyst recently cut the airline’s stock rating from “buy” to “neutral.”

Even if American manages to sort out its labor difficulties, the airline could face turbulent times ahead: it seems that competitors (including United Continental Holdings Inc. and Delta Air Lines Inc.) have already outpaced AA in passenger traffic. Any cost-cutting measure, then, would need to be accompanied by a plan for increasing revenues and wooing back fliers.

Debt Protection Costs Rising

Another indicator of rocky times ahead? The cost of insuring AMR’s debt against default for the next five years rose to its highest level since 2008. In essence, this means that:

  • Insurers are less confident that AMR will have the means to repay its debt in the coming years. These insiders base their evaluations on various financial indicators within the company.
  • AMR is running out of debt-fighting options. If it is unable to strike a labor agreement with pilots, AMR will be very limited in its ability to cut meaningful amounts of debt. This signals investors that a default may be on the horizon.
  • AMR could start seeing a spiral effect. As one measure of its economic viability weakens, others could follow, pulling the company into bankruptcy.

Of course, bankruptcy is not a sure thing at this point. And even if AMR does end up reorganizing under Chapter 11, it could reemerge stronger. In recent years, a number of airlines have successfully remade themselves with the help of the bankruptcy court.

In fact, many analysts suggest that if American had reorganized under bankruptcy when other airlines were doing so, it likely wouldn’t be in such dire financial straits right now.

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Wednesday, November 16th, 2011

Ally Bank Considering Bankruptcy for Its Mortgage Lending Unit

Ally Bank, a unit of Ally Financial (which used to go by the name GMAC) is considering putting its struggling mortgage unit, ResCap, through bankruptcy to alleviate some of that division’s debts, according to the Christian Science Monitor.

Apparently, ResCap has not done well financially during the last two quarters, losing more than half a billion dollars. On top of its recent sub-par performance, the mortgage unit also reportedly has some serious debt coming due – about $2.3 billion between now and the end of 2013. That figure comes to about four times the mortgage company’s total reserves as of the end of September.

How Does Partial Bankruptcy Work?

So what does it mean that Ally is considering bankruptcy for just its mortgage division? Here’s a summary:

  • The bank itself wouldn’t go into bankruptcy protection. Many large corporations separate their business operations into discreet arms so that they can manipulate them individually. In the case of financial difficulty, for example, a business might be able to put one part of itself through bankruptcy without greatly affecting its other parts. Think of it as amputating an arm to save a life.
  • Despite official separation, the bank could face fallout. Some analysts think that a ResCap bankruptcy is unlikely specifically because of the effect it might have on Ally’s reputation. Even if the larger company were not financially hurt by the mortgage division’s bankruptcy, consumers and investors might start to question its viability and shy away from investments.
  • It can choose between liquidation and reorganization. Depending on its needs, Ally could put ResCap through a liquidation bankruptcy that would terminate the mortgage arm’s operations or choose to reorganize the group’s debts and emerge as a (hopefully) stronger business.

A History of Bailouts?

As of now, the potential bankruptcy of ResCap is still very much in its speculative stages. While Ally may be considering liquidation or debt reorganization, it is likely also considering a number of other options.

But some analysts are pointing to Ally’s past as evidence that it might be likely to choose bankruptcy in the future. Ally officially became a bank in 2008 in order to take advantage of bailout money that was made available to banks at that time. Prior to its conversion, it operated as GMAC, the financing firm of General Motors.

The Federal Reserve Board approved its request to become a bank, Ally collected bailout money, and the firm now operates as Ally Financial. The new company offers a number of investment and savings products, emphasizing transparency and simplicity.

Earlier Mortgage-Division Bankruptcy Considerations

Earlier this year, Bank of America (the nation’s largest bank) considered a similar move for Countrywide, a mortgage division it bought during the financial upheaval. Countrywide specialized in subprime mortgage loans and, as borrowers defaulted in droves, quickly accumulated scads of debt.

As of now, though, Bank of America has opted to avoid a Countrywide bankruptcy filing. Ally may well file suit.

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Monday, October 24th, 2011

Second Mortgages & Foreclosure Rights

Filing for personal bankruptcy is often cited as a way to stop or delay mortgage foreclosure. But what happens to a person’s home in the months and years after a bankruptcy discharge? Bankruptcy may temporarily relieve the threat of foreclosure, but it doesn’t necessarily offer lifetime foreclosure immunity.

Here’s a closer look at some issues homeowners might face after filing for bankruptcy to prevent or delay foreclosure.

Second Mortgages & Home Equity Lines of Credit

One major concern for people who bought houses or refinanced their homes during the housing bubble is “junior mortgages,” or the secondary and tertiary loans and lines of credit that many homeowners were able to afford when housing prices kept rising.

Now that home values have fallen around the country, many of these secondary loans are unsecured – that is, the value of the house is less than the value of combined primary and secondary mortgages and/or credit lines.

Worry comes into play when the so-called “balloon payments” come due on these secondary loans: many homeowners simply don’t have the money on hand to cover such payments and are afraid of losing their home to foreclosure processes started by secondary mortgage lenders.

If you’re in that situation, here’s some essential information:

  • Filing for bankruptcy might help. If you haven’t already filed for bankruptcy and are having trouble making payments on secondary mortgages or lines of credit, you may be able to discharge them during a bankruptcy case. If your house’s value has fallen below the total value of your loans, secondary mortgages become unsecured debt, which is often dischargeable in Chapter 7 bankruptcy.
  • Reaffirming debts may be risky. In Chapter 7 bankruptcy, filers have three options for how to treat secured debts: they can reaffirm them (i.e. agree to keep making payments), redeem them (i.e. pay the remainder in one lump sum) or surrender the attached property (i.e. stop making payments and lose the collateral). If a filer reaffirms secondary mortgages in Chapter 7 bankruptcy, she is responsible for repaying them regardless of what happens to the house (i.e. even if she loses the house to foreclosure).
  • Lender negotiation may be possible. Chapter 7 filers who do not officially reaffirm a secondary mortgage but continue making payments may be able to negotiate modified payment terms if they become unable to afford those payments. This is particularly true if your secondary mortgage loans are unsecured: though the lender could legally foreclose, it would have to pay proceeds for the home’s full value to the primary lender before taking any money itself.
  • Debt collector negotiation may be possible: Because most secondary mortgage lenders aren’t likely to make a profit from foreclosing, there’s often a better chance that they would sell the debt to collectors than that they would foreclose. In that case, you may be able to negotiate with the debt collectors for lower monthly payments or a reduction in principal. If you do successfully negotiate modified loan repayment terms, be sure to find out whether you’ll have to pay taxes on the difference.
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Friday, October 21st, 2011

Tough Economy Pushing More Businesses into Bankruptcy?

A recent report from Reuters.com highlights a growing trend of business bankruptcy filings in the U.S. While personal bankruptcy filings have actually decreased in recent months, some lawyers are predicting that 2012 through 2014 will see upticks in business bankruptcy reorganizations.

Some lawyers, it seems, have already reported an increase in clients.

A Double-Dip Recession?

One factor some analysts are watching is the U.S. economy’s ultimate move toward or away from a double-dip recession. First, a quick look at where the economy is now: though unemployment remains high and the housing market has still not recovered from the rash of foreclosures that touched off the Great Recession, the U.S. is technically not in a recession right now – probably.

A recession only occurs when the country’s gross domestic product (GDP) recedes, or shrinks over successive quarters. In other words, when there is a decrease from one measurement period to the next, the country is in a technical recession.

The problem is, there’s no way of determining whether an economy is in a recession until after the fact – that is, we can’t measure this month’s data until next month.

Recessions & Business Bankruptcies

During economic recessions, bankruptcy filings tend to rise. That’s led some insiders to point at recent numbers reported on BankruptcyData.com:

  • Ten companies worth $100 million or more filed for bankruptcy in September of this year. The $100 million mark is often considered the threshold for a “large” company.
  • September had the highest rate of business bankruptcies since April, when 17 large companies filed.
  • Business bankruptcy filing rates have not been so high since 2009, when the country was in the thick of the recession.

Still, business bankruptcy numbers alone cannot establish the presence or absence of recessionary conditions. But businesses do tend to need bankruptcy protection more often when the economy is receding than when it is growing.

In 2008, for example, the beginning of the recession touched off the United States’ biggest bankruptcy ever. Lehman Brothers, a company worth $639 billion, filed for bankruptcy protection and caused a number of financial ripples for its customers - and the global economy.

On the other hand, a recession alone will not automatically trigger a business to file for bankruptcy. Banks’ willingness to lend money, consumers’ behavior, and developments in foreign markets could all impact future business bankruptcies in the U.S.

And often (as the airline companies have demonstrated), filing for bankruptcy can let a business restructure to emerge as a stronger entity than it was before. That’s because in bankruptcy court, businesses can eliminate debt, renegotiate costly labor contracts, modify lease agreements and otherwise take important steps to ease their financial burdens.

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