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Friday, December 30th, 2011

Involuntary Bankruptcy: How It Works

Mamtek, a company based in Moberly, Missouri, is currently facing the potential of a forced Chapter 7 bankruptcy filing by five of its creditors. The situation involves Mamtek, which manufactures an artificial sweetener, and its plans to open a plant in Moberly.

According to sources, the case has unfolded like this:

  • Mamtek planned to build a factory in Moberly. To finance the construction, the city of Moberly issued bonds worth $39 million to the company.
  • Missouri-based UMB Bank reportedly agreed to serve as trustee for the bonds, meaning that it financed the city’s agreement with Mamtek.
  • This fall, Mamtek missed a payment to the city of Moberly, and indicated that it could not afford to complete the half-built factory.
  • Without payments from Mamtek, Moberly indicated that it would default on the bonds, leaving the bank on the hook for tens of millions of dollars.
  • The bank, along with other creditors (mainly construction-related companies) took the case to the court system, urging the bankruptcy judge to force Mamtek into bankruptcy so they could recover their money.

If the judge rules in favor of the creditors, Mamtek will have to sell its assets and distribute the profits among its creditors to compensate them for the money Mamtek owes them. If the judge does not rule for the involuntary Chapter 7 bankruptcy, Mamtek may be able to abandon its building and the creditors could lose a significant portion of their investment.

Involuntary Bankruptcy for Individuals

Involuntary bankruptcy is also possible for individuals – that is, a person’s creditors can theoretically get together and attempt to force a person into bankruptcy in order to recover some of their money.

However, in the case of individuals, forced bankruptcy is fairly rare. This is partly because it requires creditors to act together and agree to request a forced bankruptcy, and partly because most people who need bankruptcy protection often do not have sufficiently valuable assets to make a liquidation and creditor distribution worthwhile.

Further, in order for the involuntary bankruptcy of an individual to be legal, certain conditions must be met:

  • For a single creditor to force involuntary bankruptcy, creditors must be unsecured, fewer than 12 in number, and owed at least $5,000 by the debtor.
  • If a debtor has 12 or more creditors, at least three of them must join together to file the involuntary bankruptcy petition.
  • Creditors can force an individual into Chapter 7 bankruptcy (and possibly Chapter 11), but not into Chapter 13 bankruptcy.
  • Debtors have a chance to answer the involuntary bankruptcy petition in court.

It’s important to know that a creditor’s involuntary bankruptcy petition for a debtor does not guarantee that the court will agree to push the debtor into bankruptcy. If you have received notice that creditors are attempting to force you to file for bankruptcy, it’s a good idea to speak with a bankruptcy lawyer about your options.

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Posted in Filing Requirements | 1 Comment »

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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Posted in Economic News: How Are We Doing?, The Truth about Bankruptcy | No Comments »

Friday, November 25th, 2011

More Financial Planners Filing for Bankruptcy in 2011

A report from Financial-Planning.com notes an unsettling trend in bankruptcy filings: in recent years, the number of Certified Financial Planners (CFPs) filing for bankruptcy protection has increased. CFPs are highly trained financial experts who must undergo rigorous training and pass difficult tests in order to become certified.

In 2010, according to sources, as many as a quarter of the disciplinary cases heard by the CFP Board involved CFPs filing for bankruptcy protection. So far in 2011, that number is on pace to reach one-third of all cases.

The History of Bankruptcy among CFPs

In fairness, the CFP board only began tracking bankruptcy statistics in 2010, though its guidelines have always required the board to investigate any personal or business bankruptcy filings it heard about. Still, the frequency of bankruptcy filing seemed high to Board members, and at least one attributed the 2010-to-2011 climb to the failing economy.

One encouraging fact that emerged in the Financial-Planning.com report was that the Board takes a number of factors into consideration when deciding how to proceed after a CFP’s bankruptcy. Depending on the circumstances, the Board may:

  • Offer censure or some sort of penalty. Some CFPs who file for bankruptcy are required to take remedial courses, though they are allowed to continue practicing. Even when CFPs are allowed to move forward with practice, though, they may have difficulty bouncing back after filing for personal or business bankruptcy. Sources indicate that CFPs have reported mixed results after attempting to restart a financial planning enterprise post-bankruptcy.
  • Revoke a license. In cases that the Board judges to be egregious, it might revoke a CFP’s license to practice financial advising. Cases that raise particular red flags, sources note, are those in which actions of the CFP clearly and directly caused the debt that led to bankruptcy and second or third bankruptcy filings.
  • Do nothing. If the circumstances are beyond the bankruptcy filer’s control (for example, if the CFP filed for bankruptcy to eliminate debts associated with medical bills), the board may take no disciplinary action. It does not consider such bankruptcy filings to indicate any “fault” on the part of the filer.

Comparison to the General Public: Bankruptcy Figures

Interestingly, the CFP’s bankruptcy filing numbers are not quite in step with the rest of the country’s. While total consumer bankruptcy filings peaked among the general U.S. population in 2010 and have declined this year, filings among CFPs are still rising—and perhaps may not hit their peak for some time.

Of course, the figures associated with CFP bankruptcies cannot be considered quite as exhaustive as those for the rest of the country, especially since the CFP Board has only just begun collecting data on this particular phenomenon.

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Posted in Finance 101: Secure Your Future | No Comments »

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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Posted in Bankruptcy News and Events, Identity Theft | No Comments »

Wednesday, August 24th, 2011

The Bankruptcy Option for Countrywide

In 2008, Bank of America acquired Countrywide Financial, a mortgage lending company that was heavily involved in subprime lending practices during the housing boom. Since the merger between the two companies, Countrywide has proven a costly addition to the Bank of America brand.

Since 2008, according to The New York Times, Countrywide has cost Bank of American tens of billions of dollars in legal fees in addition to other significant losses.

Now, media outlets are throwing around the question of whether or not Countrywide might attempt a bankruptcy filing to help ease some of its debt. Here’s a look at what some insiders are saying.

Business Bankruptcy Rules

If an individual was losing as much money as Bank of America, she would likely need bankruptcy protection. But businesses have different considerations and are governed by different laws than individuals. Consider these.

  • Limited liability: One key element that might affect whether or not Bank of America chooses bankruptcy for Countrywide is whether it’s considered liable for the company’s losses. Business mergers commonly include provisions that limit the legal responsibility shareholders (and the other business) have for the acquired business’s debt. If these laws apply, Bank of America may not need bankruptcy for Countrywide.
  • Consolidation transactions: But there’s a chance the limited liability laws won’t apply in Bank of America’s case. That’s because the bank apparently engaged in a series of complicated transactions upon its acquisition of Countrywide to transfer its profits and debts to various subsidiaries.
  • Acquisition of notes and debt: In addition to the consolidation moves, Bank of America also reportedly took on some of Countrywide’s debt and assets. This further complicates the question of whether or not Countrywide remains separate enough from Bank of America to qualify for bankruptcy on its own.

Many of the complex manipulations between Bank of America and Countrywide came to light when insurance giant AIG filed a lawsuit against the bank insisting that it is liable for the mortgage lender’s debts.

At its heart, the question of bankruptcy is one of separation and commingling. Think of it this way: Countrywide’s financial distress could have been, to Bank of America, like a frostbitten limb. If amputated in time, the rest of the body could have been saved.

But because Bank of America reportedly allowed its healthy parts to mix with the troubled parts, separating the bad stuff from the good stuff might not be so simple. Many analysts have suggested that, because of the complexity of the maneuver, bankruptcy for Countrywide is an unlikely option.

Mortgage-Related Bankruptcy for Individuals

Unfortunately, the potential bankruptcy of Countrywide holds no real poetic justice for those who turned to bankruptcy because of unaffordable subprime mortgages. Rather, the financial faltering of an entity as large as Bank of America is just another symptom of a woebegone economy whose problems started in the housing market.

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Posted in Economic News: How Are We Doing?, Predatory Lending | No Comments »

Wednesday, June 29th, 2011

Former Billionaire Files Chapter 7 Bankruptcy

We’ve all heard stories about lottery winners ending up in bankruptcy court, so it’s interesting to hear a twist on the usual saga. According to Time magazine, Patricia Kluge (once called "the richest divorcée in history") has filed for Chapter 7 bankruptcy.

This, after her 1990 divorce left her with a reported $1 billion settlement. Astonishing as it is, it teaches some important lessons about money, debt and bankruptcy.

Why the Very Rich Go Bankrupt

It’s easy to imagine that if we won the lottery, all our money problems would go away. But as Ms. Kluge shows us, it’s not about how much money you have, it’s about how you manage it. This lesson is valuable whether we’re billionaires or recent bankruptcy filers.

So how can you make sure you’re managing your money well?

  • Know what you make: Seriously. Look at your income and know exactly how many dollars flow into your bank account each month.
  • Know what you spend: With digital banking and tracking tools, this is easier than ever. But a surprising number of people don’t bother keeping track of where their money goes. Until you actually figure out how you’re spending your money, you won’t be able to make meaningful financial decisions.
  • Make a plan: Some people would call this a “budget.” But lots of us don’t like that word. So instead, plan where you want your money to go. Plan for some to go to savings, some to go to bills, and some to go to treats.
  • Look ahead: We’re often blindsided by expenses that we “didn’t see coming.” But if you haven’t taken your car in for a checkup in years (or haven’t seen the dentist in ages), you’re playing a risky game. Small maintenance costs are usually cheaper than major repairs or replacements, so keep track of the state of your health and appliances.
  • Look behind: One way to plan for future emergencies is to review your expenses of the last few months and years. First kid needed braces? Better start saving for the second. Air conditioning on the fritz? Put some money away for next summer. It’s natural to ignore problems we don’t want to deal with, but that can lead to long-term turmoil in your finances.

Most of us won’t have the chance to squander a billion dollars, but anyone who files for bankruptcy is eligible for a shiny new financial start at the end of the case. It’s important for all of us to remember that bankruptcy is the beginning of a process – careful financial management in the post-bankruptcy period can make the difference between financial floundering and financial success.

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Posted in Bankruptcy News and Events | 1 Comment »

Wednesday, June 15th, 2011

What Do You Know about Taxpayer Identity Theft?

You’ve probably heard of the crime known as identity theft, in which a criminal uses someone’s sensitive information (like Social Security Number, credit card number, or bank account information) to make fraudulent financial transactions.

But have you heard about the newest version of this nefarious crime? It’s called taxpayer identity theft and, according to the Government Accountability Office (GAO), it’s become five times more common in the last two years. It works like this:

  • The identity theft uses someone else’s SSN to get a job: People may do this for a variety of reasons, including criminal records or illegal residential status. Regardless, it can wreak havoc on the victim’s life and finances.
  • The identity thief files his taxes early: Most legitimate taxpayers tend to wait until later in the season to file, so getting the paperwork in early increases a thief’s chances of going undetected.
  • The victim files his tax return: When the victim of taxpayer identity theft submits his forms to the IRS, he finds out his forms have “already” been submitted. That is, forms with his information have been submitted by someone else.
  • The victim has to sort everything out: According to sources, this can mean hours of phone calls to government agencies, credit card issuers and banks in an effort to clear up the confusion. In many cases, victims have to wait up to six months to get any tax returns owed them.
  • The IRS distributes an official form: To help the victim with future confusion the identity theft is likely to cause, the IRS offers victims an official document (the 14039 form, or the IRS Identity Theft Affidavit).

Protecting Yourself from Identity Theft

As identity theft victims know, sorting through the mess left by an identity thief is not for the faint of heart. Identity theft can cause:

  • Credit score damages: Identity thieves can open new credit accounts, max out existing cards, drain bank accounts and more, depending on what information they get. All these can hurt a credit score. (Note: credit reporting bureaus will remove such information, but it takes a lot of legwork on the victim’s part.)
  • Bankruptcy: Even though there are protections in place to prevent identity theft from leading to bankruptcy, many filers indicate that a stolen identity was one factor that led them to file.
  • Criminal troubles: Depending on what kinds of actions an identity thief engages in, a victim can be mistakenly apprehended by law enforcement agencies. Like most identity theft consequences, this can generally be cleared up, but not without effort on the victim’s part.

The bottom line? Identity thieves are constantly thinking of new ways to get their hands on sensitive information. Be careful with yours.

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Posted in Identity Theft | 1 Comment »

Monday, June 13th, 2011

Inherited Money in Bankruptcy

One question that many potential bankruptcy filers have is how the bankruptcy court handles inherited money and money that bankruptcy filers expect to receive in the months after their filing. The answer depends on a few variables. Here’s a look at some of them.

  • The 180-day rule. One of the most important rules about bankruptcy and inheritance is that funds inherited within 180 days (or about six months) of the filing of a bankruptcy petition are generally considered to be part of the bankruptcy estate. This means that the bankruptcy court has the right to use those funds to repay creditors, pay court fees or do anything else it deems appropriate.
  • Date of death. In the case of money inherited from a deceased person’s estate, the date of death will be taken into consideration. If the person died within the 180-day window, then the funds generally go to the bankruptcy estate, even if the filer doesn’t receive them until some time later.
  • Type of inheritance. Another factor bankruptcy courts consider is how a person inherited money. Depending on laws in your state, the court might treat an actual will differently than another type of contract designating you as heir to certain money or property. A bankruptcy lawyer in your state can help you figure out how the court is likely to treat your expected inheritance.
  • Exemptions. In some states, inherited property might be protected by bankruptcy exemptions. In certain cases, even if an inheritance falls within 180 days of a bankruptcy filing, the filer may be able to keep the inherited property.
  • Bankruptcy fraud. It’s important to note that filers must report any expected inheritance on their bankruptcy petitions. If a filer tries to lie about or conceal inherited assets, the court could convict him of bankruptcy fraud, which is punishable by a serious fine and up to five years in jail.

Inherited Money & Debts

If you have reason to expect that you will inherit money or assets in the near future, it’s a good idea to start thinking now about how you plan to use that money. While debt repayment is one option, it’s not the only one.

Consider speaking with a financial adviser about your options for setting up an emergency fund, negotiating your debts, and taking money management or investment classes. If you have debt, taking advantage of an influx of cash to improve your overall financial system may be more effective than simply making a one-time debt repayment.

Alternately, if you’re expecting an inheritance and wondering whether or not filing bankruptcy makes sense for you (either now or later), you may want to seek the counsel of a bankruptcy attorney.

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Posted in Filing Requirements, The Law and Your Money | No Comments »

Monday, May 23rd, 2011

Study: Bankruptcy Considered or Filed by One in Eight Americans

A study recently published by the web site Find Law indicates that a considerable percentage of the U.S. population (one in eight survey respondents, or nearly 13 percent) has either considered filing for bankruptcy or actually done so.

That figure may seem high, but in a nation of consumer debt, depreciating home values and a limited job market, perhaps it’s no wonder that so many of us are in need of serious the serious financial protection and debt relief that bankruptcy can offer.

Who Is Considering Bankruptcy?

The study breaks down potential bankruptcy filers in part by age:

  • Americans between 35 and 54 are reportedly the group most likely to consider bankruptcy as an option.
  • Americans 18 – 34 and 55 and older are, according to sources, half as likely as the middle age group to consider or actually file for bankruptcy.
  • Senior citizens (those 65 and older) are apparently the least likely group to consider bankruptcy as a debt relief option, at only seven percent.

How Have Bankruptcy Filing Numbers Changed in Recent Years?

Sources indicate that in 2010, 1.5 million Americans actually filed for bankruptcy protection. This number marks the highest annual total since 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect and tightened the standards for those interested in bankruptcy protection.

Why Do So Many People Need Bankruptcy Protection?

While no two bankruptcy cases are alike, bankruptcy filers often note common triggers that led them to seek the protection of the bankruptcy court. These include:

  • Unexpected medical expenses: Illness and injury can both cause serious medical bills to build up, particularly for those people who are uninsured or underinsured. And even an otherwise happy event, like the birth of a child, can prove very expensive.
  • Change in family makeup: Divorce and death are difficult to deal with on their own, but are often compounded by the financial troubles they cause. Many families are forced to face unpleasant financial realities after divorce or death carries off a primary breadwinner.
  • Job loss or reduction: Even good employees are at risk of losing their jobs in the current economic climate, and even though layoffs have slowed in recent months, the unemployment rate remains high. It’s no secret that this type of financial burden can lead a household to seek bankruptcy protection.
  • Fear of foreclosure: Even those with good health and steady jobs may find themselves unable to keep up with their mortgage, and some families opt to file for bankruptcy in hopes of fending off mortgage foreclosure.

Considering the many factors that can contribute to a household’s decision to file for bankruptcy protection, it may be a wonder that only one in eight Americans has thought about personal bankruptcy!

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Posted in Bankruptcy News and Events, The Truth about Bankruptcy | No Comments »

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