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Monday, February 6th, 2012

Sandwich Chain Quiznos Avoids Bankruptcy

News outlets have reported in recent weeks how the recession hit Denver-based sandwich chain Quiznos. In fact, until recently, many sources assumed Quiznos would opt for bankruptcy protection to alleviate its debt burdens brought on by a lowered demand for sandwiches and a price war with its main competitor, Subway.

But this week, the sub shop decided to avoid bankruptcy court by ceding control of its operations to Avenue Capital, one of its major creditors. According to sources, the deal will involve a takeover of corporate management by Avenue, while franchise operations should continue to operate normally.

Bankruptcy & Bankruptcy Alternatives for Individuals

At the corporate level, the Quiznos decision to avoid bankruptcy made sense: in exchange for eliminating some of the sandwich chain’s debt, Avenue got to take corporate control. If the new owner plays its cards right, it could make the changes necessary to turn Quiznos around and return it to profitability.

Individuals may face similar choices. Here’s how to navigate the world of debt-relief options.

  • Creditor negotiation: Essentially the Quiznos route, this method of easing debt may benefit both parties. Debtors get some of their debts forgiven by their creditors, and creditors don’t have to worry about having those debts completely eliminated by the bankruptcy court. In some cases, individuals can negotiate with creditors for modified repayment terms (such as lower interest rates, reduction in principal, or lowered monthly payments) in exchange for refraining from filing bankruptcy. Note: if you’re interested in creditor negotiation, be sure to let your creditors know that you’re considering a bankruptcy filing, and be sure to get any new agreements in writing.
  • Credit Counseling: This bankruptcy alternative involves visiting with a credit counseling professional to work through a debt-elimination plan. These plans may be comprehensive, including budget outlines, repayment schedules, and suggestions for future credit and debt usage. Note: if you’re considering credit counseling, be sure check your local Better Business Bureau for complaints against the firm.
  • Debt Settlement: In debt settlement, the debt settlement agency communicates with a debtor’s creditors to negotiate better debt repayment terms. While potentially very effective, debt settlement can also end in disaster (when firms unscrupulously take consumer money without actually helping them resolve their debt issues). Note: if you’re considering debt settlement, be sure to consult with the BBB and other online resources to determine the quality of the company you’re working with.

When to Choose Bankruptcy

It’s important to note that, while bankruptcy is not the right choice in all debt situations, it remains the only debt elimination solution that is regulated at the federal level and offers filers protection from debt collectors and creditors through the court's automatic stay.

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Posted in Bankruptcy News and Events | 2 Comments »

Thursday, January 26th, 2012

JPMorgan Chase Accused of Bankruptcy Fraud in Class Action Suit

A class action lawsuit being brought against JPMorgan Chase alleges that the bank engaged in fraudulent activity in tens of thousands of bankruptcy cases.

The suit claims that the bank actively deceived many people involved in the bankruptcy process, including Chapter 7, Chapter 13, and Chapter 11 trustees; bankruptcy judges; creditors; creditor attorneys; debtors, debtors in possession, and debtors’ attorneys; and the Office of the United States Trustee.

Among the charges being leveled against Chase are that the bank did the following:

  • Committed fraud, perjury, and intentional misrepresentation in bankruptcy court by producing false title transfer evidence (sources claim that the bank used PhotoShop in some cases) in order to “prove” its stake in thousands of bankruptcy cases.
  • Provided manufactured evidence to willfully deceive those involved in the bankruptcy process about who truly held class members’ non-negotiable promissory notes.

What Is Chase Actually Accused Of?

In plain English, Chase is facing charges of providing false evidence regarding home mortgages in bankruptcy cases. Specifically, the lawsuit alleges that:

  • Chase fabricated documents that recorded its chain of ownership of residential mortgage loans. In order to be able to claim ownership of mortgage debt in bankruptcy court (or any court), a person must have a hard copy of the mortgage’s promissory loan (also called a Master Loan Note, or MLN). Because of electronic mortgage registration systems and securitization of mortgages (two factors that greatly contributed to the expansion and burst of the housing bubble), however, most banks no longer hold paper MLNs.
  • Chase presented falsified documents in bankruptcy court. In order to “prove” that it was the lender to whom a bankruptcy filer owed money, Chase allegedly presented these fabricated documents to bankruptcy courts (because it did not have actual documentation).
  • Chase rewarded lawyers for speedy action. During a bankruptcy case, filers are protected from collection actions like foreclosure by the automatic stay. But creditors can petition the court to lift that stay in order to collect on certain debts. In Chase’s case, the charges claim, the bank rewarded attorneys for producing false documents quickly and convincing the court to lift the stay quickly so that Chase could foreclose or collect money on a bankruptcy filer’s home.

Who Is Affected By the Class Action Suit?

The class named in the suit (Ernest Michael Bakenie v. JPMorgan Chase Bank, N.A., filed in the Central District of California) includes bankruptcy filers who live in California. To find out whether you are a member of the class, you can consult with a bankruptcy lawyer in your area.

Plaintiffs in the suit are seeking damages, restitution, injunctive relief, and disgorgement of profits.

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Posted in Bankruptcy News and Events, The Law and Your Money | 1 Comment »

Tuesday, January 24th, 2012

Dodgers Get Nod from Bankruptcy Judge for Fox Settlement

The bankruptcy judge overseeing the bankruptcy of the Los Angeles Dodgers has approved an agreement reached between the team and Fox News, meaning that a sale of the team can go forward, according to reports from the Associated Press.

The news was met with relief from the team’s creditors, because quick approval will likely translate to the team’s ability to maximize the value of its bankruptcy estate with a timely sale and fewer legal negotiations than might have otherwise been required. Creditors get paid based on the amount of money available in the bankruptcy estate, so the agreement and court approval seem to be good news for everyone.

While the bankruptcy of a professional baseball team may seem as if it’s worlds away from most people’s individual debt struggles, the Dodgers’ bankruptcy drama actually provides a great jumping-off point to clarify some key elements of the process of personal bankruptcy.

What the Dodgers Can Teach You about Personal Bankruptcy

Avoid the mistakes that led this baseball franchise into bankruptcy court, and you’ll improve your own odds at financial success.

  • Don’t live off future earnings. One major reason the Dodgers were pushed into bankruptcy was because the team’s owner, Frank McCourt, was counting on the renewal of a TV deal from Fox Sports to pay salaries in the coming year. When Major League Baseball’s commissioner rejected the contract Fox offered, McCourt was left with few choices other than to file for bankruptcy and lose control of the team—which is what the commissioner wanted in the first place (see the next list item).
  • Dicey accounting won’t hold up in the long term. One reason MLB’s commissioner pushed the Dodgers into bankruptcy was because McCourt was allegedly using team money for non-team (i.e. personal) expenses. It seems McCourt frittered away as much as $180 million that didn’t belong to him, which led higher-ups in the league to target him for removal.
  • Sometimes, you are your own best asset (in a good way!). The Dodgers are working on finding a new TV deal, which will partly finance their team expenses next season. Because enough people want to watch the Dodgers, the team should be able to emerge successfully from bankruptcy protection—and the same is true of most individuals! If you have the drive and determination to eliminate your debt and prove yourself to be a good credit risk, creditors, employers, and others will eventually see that and you’ll be able to recover after bankruptcy. Bids to purchase the Dodgers were due on January 23, and already a number of possible buyers have reportedly expressed interest in the team.
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Thursday, January 12th, 2012

NY Mets Taking First Step Toward Bankruptcy?

In a statement released last week, the New York Mets (i.e. the city’s non-Yankees baseball team) announced that it was enlisting the help of a financial firm known as a “turnaround specialist and bankruptcy consultant,” as the New York Times puts it.

In 2010, the company helped oversee the bankruptcy filing of the Texas Rangers. But while the Mets are reportedly facing some pretty serious debt burdens (including $400 million owed to several banks and $25 million owed to Major League Baseball), the team has not given any other public or official indication that it is considering a bankruptcy filing. Still, the consultation with the bankruptcy-focused firm suggests that the team is certainly considering court protection.

So what can individuals learn from the Mets’ maneuvers? Primarily that the bankruptcy process should begin long before an individual actually files his or her bankruptcy petition with the court. For most individuals, the bankruptcy process really begins during the information-gathering period.

Talk with the Right People Before Choosing Bankruptcy

Like the Mets, those considering personal bankruptcy can and should consult with knowledgeable sources before deciding whether or not to file a petition with the bankruptcy court. Individuals have a few choices about whom to speak to:

  • A credit counselor: Many credit counseling organizations provide free or low-cost financial evaluations for consumers in need of guidance about whether or not to file for bankruptcy. Credit counselors run by community groups often charge little or nothing for leading consumers through a non-bankruptcy debt elimination process. And if you do decide to seek bankruptcy protection, the court requires a pre-filing credit counseling session anyway.
  • A bankruptcy lawyer: Most bankruptcy lawyers offer free initial consultations during which they can help clients determine whether filing for bankruptcy makes sense financially. After that consultation, the client can move forward with bankruptcy or a bankruptcy alternative confident that his or her decision will work in his or her own best interest.
  • An accountant: Those who work with an accountant or tax preparer regularly may find consulting with this person useful as part of the bankruptcy-consideration process. Small business owners may be best served by an accountant’s opinion.

The Importance of A Well-Informed Bankruptcy Decision

Filing for bankruptcy is a major financial step in anyone’s life, and should not be undertaken lightly. Further, waiting until the last possible minute to file for bankruptcy can have detrimental effects on an individual’s or family’s finances.

By starting the bankruptcy process well ahead of actually filing a bankruptcy petition, individuals set themselves up for a less stressful (and potentially more successful) bankruptcy process. For many Americans struggling with debt burdens, consulting a financial or bankruptcy professional is the first step in making a decision about bankruptcy.

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Posted in Bankruptcy News and Events, Pre-Bankruptcy Credit Counseling | 1 Comment »

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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Tuesday, September 27th, 2011

Digital Certificate Provider Files for Bankruptcy after Hack

DigiNotar, a Dutch company that provided digital authentication certificates for Dutch government-owned Internet domains, has filed for bankruptcy after a serious hacking incident led to a significant security breach. Wired.com reports that DigiNotar, which is owned by Vasco Data Security (an Illinois company) was hacked in June because of insufficient security.

The hacker, according to reports:

  • Obtained more than 500 fake digital certificates for major web sites (including Google, Skype and Mozilla); and
  • Could use those certificates to collect users’ sensitive information when they entered it onto what they thought were secure sites.

Shortly after the breach was announced, the Dutch government reportedly stopped using DigiNotar’s services. When Vasco Data Security announced DigiNotar’s bankruptcy, it apparently made explicit its plans to maintain its own high security levels and to cooperate with the bankruptcy trustee and judge as necessary.

Digital Privacy & Identity Theft

The world of online identity protection relies on a system of encryption and authentication that, if hacked, can allow unauthorized individuals or groups to access sensitive information. When a hacker obtains false security certificates (as happened with DigiNotar), that hacker could access users’ accounts and even read their communications.

One of the main reasons that this hacking incident led to DigiNotar’s bankruptcy is that the company had failed to take adequate steps to protect itself from potential hackers. Apparently:

  • The hack occurred in early June but the company was not aware of it until mid-July, when an independent company conducted an audit of its security features;
  • DigiNotar’s system did not include strong passwords, anti-virus protection or updated software patches;
  • DigiNotar did not admit to the breach until August, when Iranian Gmail users reported difficulty accessing their email. At that time, Google confirmed that a fraudulent certificate was available and possibly being used to offer a fake Gmail page.

After reports of the incident surfaced, an Iranian man in his early 20s reportedly identified himself as a hacker and noted that his actions were an act of political retaliation for events that occurred during the Bosnian war in 1995.

The hacker may have allowed Iranian government officials to access citizens’ Gmail accounts, thus possibly providing them with a means of spying on dissidents. In other contexts, similar hacking feats could translate to other types of identity theft.

Major Blow to Legitimacy

After the incident played out, Google, Mozilla and other major web sites announced that they would no longer accept authentication certificates issued by DigiNotar, as they no longer trusted the company to adequately protect itself from hackers.

The bankruptcy filing will likely allow Vasco Data Security to maintain its operations without significant interruption.

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Monday, August 15th, 2011

How the Debt Deal Might Affect Student Loans

Media attention to the fallout from the Congress’s last-minute decision to raise the debt ceiling has mostly gone to the downgrade in America's debt rating by credit rating agency Standard & Poor’s. But another potential side effect may have a more direct impact on some American consumers.

As part of the debt compromise, Congress agreed to cut nearly a trillion dollars in spending – and one casualty was federal subsidies for student loans. That means that people interested in borrowing money for higher education may see a higher price tag for that privilege in the near future.

Student Debt & Bankruptcy

So why is an increase in the cost of student loans a big deal? For a few reasons:

  • Student debt in the United States has already topped $800 billion and analysts estimate that it will reach $1 trillion by the end of 2011. That’s more than our credit card debt, which was estimated at $793 billion in May 2011.
  • The job market has been slow to recover since the recession hit, especially for younger job seekers. Nationally, unemployment is hovering at about 9.1 percent, meaning that finding a job after graduating is tougher than it once was. And the average college graduate hits the job market with about $24,000 in student debt.
  • Student loans are not dischargeable in bankruptcy. That means that borrowers are legally obligated to repay their student loans no matter what (though some rare exceptions exist).
  • For-profit universities have recently faced new sanctions that require them to meet certain requirements in order for their students to receive federally subsidized student loans. The measure was put in place because of evidence that showed students were borrowing money to pay for these schools that they were unlikely to earn back based on income projections upon graduation.

In other words, educational debt in the U.S. has already proven cause for concern from many consumer advocates. An increase in interest rates will mean an increase in the amount of that debt.

Change to Student Loan Rates

As of now, federally subsidized Stafford loans come with an interest rate of 3.4 percent. What’s more, under the current system, the government covers interest that builds up while a student is actively pursuing her education.

When the debt ceiling-related changes go into effect next year, though, that interest rate will double to 6.8 percent and the interest waiver for active students will disappear. Further, the new law removes certain rate reductions that are currently used to incentivize on-time payment.

Student lending is an interesting sector of the U.S. economy: unlike most other loan products, student loans are offered freely, without much regard for a person’s credit history. Because of this, it’s far too easy for young adults to take on more debt than they realize – and entirely possible that they’ll get in over their heads.

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Tuesday, July 26th, 2011

Borders’ Bankruptcy: Reorganization to Liquidation

The Borders bankruptcy case currently making headlines provides a helpful illustration of the difference between the two main forms of bankruptcy, reorganization and liquidation. Here’s a look at what we can learn about personal bankruptcy from the Borders situation.

Reorganization: Chapter 11 and Chapter 13 Bankruptcy

Reorganization bankruptcy is exactly what its name suggests: it allows filers to reorganize their debts and assets to catch up on overdue payments. When a business files for reorganization (usually under Chapter 11 of the U.S. Bankruptcy Code):

  • It continues operating. Some store branches may close and the company may “streamline” its operations to make itself leaner and more likely to turn profits when the bankruptcy concludes.
  • It repays creditors. Chapter 11 cases, like Chapter 13 cases, include a plan that allows the filing company to compensate its creditors at least in part for its debts.
  • It tries to emerge stronger. The goal of a business reorganization is to trim the fat and let the company get back on its feet with a more workable model.

The Borders situation, though, seems unable to benefit from a Chapter 11 bankruptcy. Sources suggest that this is because of a number of factors, including the weak economy, the changing face of books and the fierce competition it faces from online booksellers.

When an individual enters a reorganization plan (usually under Chapter 13 of the U.S. Bankruptcy Code), she also makes payments to her creditors. At the end of the repayment period (usually three to five years), her goal is to emerge debt-free and with financial habits that will keep her that way.

Liquidation: Chapter 7 Bankruptcy

When a company liquidates (under Chapter 7 of the U.S. Bankruptcy Code), it sells off its assets and ceases operations. In other words, if Borders does indeed file for Chapter 7 bankruptcy, it will no longer be around. Business liquidations usually:

  • Involve a sale: This might come in the form of an “everything must go” sale of merchandise in stores, an auction to other businesses, or some combination of the two.
  • Lead to partial repayment: The proceeds from the sales are generally used to repay in full or part any creditors to which the company owes money at the time of filing.
  • Mean job losses: In Borders’ case, the company would have to close its 399 remaining stores and likely lay off the more than 10,000 people it currently employs.

Individuals who file for Chapter 7 usually don’t have enough income to make repayments to creditors. The liquidation part of an individual bankruptcy filing involves the bankruptcy trustee selling a filer’s non-exempt assets to raise money to repay creditors in part.

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Monday, July 11th, 2011

Toni Braxton’s Bankruptcy Exemptions

Celebrity bankruptcy is nothing new. Cyndi Lauper, Mike Tyson, Willie Nelson and Donald Trump – among others – have filed for bankruptcy protection at some point in the past. And right now, singer Toni Braxton is reportedly working out the terms of her second bankruptcy filing (the first was in 1998).

Braxton’s Chapter 7 case, filed last year in California, highlights some interesting Chapter 7 bankruptcy rules. Here’s a look at what she’s facing in court and what ordinary folks can learn about bankruptcy from her situation.

  • Non-dischargeable debts: Some of the debts listed in Braxton’s Chapter 7 petition include those considered non-dischargeable in court. Tax debt, for example, often falls into this category (sources report that Braxton’s case included a debt of nearly $400,000 to the Internal Revenue Service). Chapter 7 filers may have certain debts excused, but they’re on the hook for repaying the non-dischargeable debts even after the end of the bankruptcy case.
  • Exemptions: Chapter 7 bankruptcy filers are able to keep certain possessions out of the liquidation sale used to raise money for creditors. The specific exemptions filers get depend on their state of residence, but usually include a home, a car, clothing, work tools and other household necessities. In Braxton’s case, her lawyer has reportedly worked out a deal that will permit her Grammy awards and some other luxury items (like a Porsche and a piano) not usually protected in bankruptcy.
  • Bankruptcy trustees: The trustee’s job in a bankruptcy case is to get as much money as possible from a filer’s estate and to use that money to repay creditors. In Braxton’s case, the trustee required the singer to work out a deal with the IRS for her tax debts. Sources note that, as of now, Braxton has agreed to make monthly payments to the government, which will have a lien on some of her more valuable possessions. This means that, if she falls behind on payments, the government can seize the property connected to the lien in lieu of payment.
  • The goal of bankruptcy: Bankruptcy is intended to help filers eliminate debt while helping creditors recover as much of the money they’re owed as possible. In order to strike that balance, the court prioritizes some types of debt (like tax debt) over others (like credit card debt). A filer’s money (including any funds raised from selling non-exempt assets) is then distributed to the most important creditors first.
  • Life after bankruptcy: While any number of external factors can lead a person to seek bankruptcy protection more than once, celebrities who file repeated bankruptcy petitions (especially those like Braxton, whose albums have sold millions of copies) remind us of the importance of making the most of the fresh financial start bankruptcy offers. After bankruptcy, filers must take steps to change their financial habits – otherwise, they’re likely to end up in bankruptcy court again.
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Thursday, June 30th, 2011

Bankruptcy Fraud Investigation Continues after Fraudster’s Death

The Wall Street Journal reported this week on a man whose bankruptcy case has outlived him. And he’s not too sympathetic a character: after defrauding clients of his business out of $19 billion, the man was reportedly put into federal prison.

Sources indicate that the fraudster, Barry Stokes, died in a hospital there before his bankruptcy trustee had been able to work through his case. As of now, reports note that:

  • Hidden assets are still missing: This unsavory fellow apparently owned a lot of (somewhat) valuable art but hid it before his death. Most was found, but the trustee is still hunting some of it down. The proceeds from a sale of the art would go to his creditors.
  • Liquidation won’t help much: Unfortunately, even though some pieces of the art could be worth upwards of $25,000, the money won’t do much for his debts of more than $30 million.

Fraudster Used Clients’ Retirement Funds to Buy Art

The details of this particular bankruptcy case are heartbreaking. Too often, individuals struggling with debt dip into their retirement accounts in an effort to stave off creditors and avoid filing for bankruptcy. And in many cases, people like this end up in bankruptcy anyway, without any nest egg for their retirement.

In this case, Stokes ran a business that managed people’s retirement funds and skimmed whatever he wanted from those funds for personal purchases. Now, his clients are his creditors in bankruptcy and have filed claims for more than $30 million.

The worst part? Because Stokes reportedly didn’t have much in the way of valuable assets, these people will likely not see much of their retirement money again!

Bankruptcy & Retirement Funds

For the record, retirement funds have a special place in bankruptcy:

  • Exempt from creditors: Whether you file for Chapter 7 or Chapter 13 bankruptcy, the bankruptcy court typically will not go after your retirement funds during a bankruptcy case. The idea is that these funds will keep you financially sound in the future and so it’s in everyone’s best interest to leave them alone.
  • Heavily taxed: What’s worse, people who withdraw retirement funds early face serious tax penalties. That means they don’t get the full benefit of the funds either in the present or the future!
  • Irreplaceable: Most of us accumulate money for retirement gradually, over several decades. Using that money for debts can seriously damage your long-term financial health because it’s close to impossible to replenish the supply.

The bottom line about retirement funds: they’re safe in bankruptcy. If your nest egg is the only thing between you and the bankruptcy court, you might want to keep it safe and talk to a bankruptcy attorney about filing a petition.

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