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Monday, August 1st, 2011

What Happens When a City Files for Bankruptcy?

Bankruptcy has been in the news a lot lately, and not just because individuals are seeking bankruptcy protection. Thanks largely to the economic strain in much of the country, municipalities are now considering bankruptcy in large numbers.

But what happens when a city, town or county files a bankruptcy petition? Here’s a look.

Chapter 9 Bankruptcy: For Municipalities Only

Individuals can file for bankruptcy under Chapter 7, Chapter 11, Chapter 12, Chapter 13 of the U.S. Bankruptcy Code. When cities file, though, they must do so under Chapter 9, a type of bankruptcy designed during the Great Depression to help municipalities in distress.

Here’s a look at how Chapter 9 bankruptcy works.

  • Two main reasons cities file: According to insiders, municipalities that choose Chapter 9 protection tend to do so for one of two reasons. Either they’re faced with a one-time catastrophe that prevents them from repaying their creditors, or their financial structure is fundamentally unsound and unsustainable. Cities with the former problem may move into and out of bankruptcy more quickly than those with the latter problem, which may spend more time negotiating with creditors and considering bankruptcy alternatives.
  • Eligibility for bankruptcy: Not all municipalities are legally permitted to file for bankruptcy. Eligibility is regulated by state laws, and in some states no district can seek Chapter 9 protection. Elsewhere (as in California), any municipality has the bankruptcy option and in still other places, judges decide on a case-by-case basis whether or not a town can file.
  • Chapter 9 capabilities: Once a town enters bankruptcy protection, Chapter 9 gives it the ability to negotiate labor contracts that might otherwise have been off-limits because of union laws. In some cases, negotiating pension terms or other benefits allows the city to seriously cut costs in a way that it couldn’t have done without the protection of the bankruptcy court.
  • Pre-filing negotiations: In some cases, the mere threat of a Chapter 9 bankruptcy is enough to convince creditors and other groups to negotiate with a municipality. Because bankruptcy can mean that creditors lose a significant amount of the money they invested in a town, many are willing to accept a deal to prevent the town from filing a petition.
  • Chapter 9 frequency: Despite the threats of municipal bankruptcies that pepper newspapers, actual Chapter 9 filings are fairly rare. This is partly because once towns recognize bankruptcy as an option, they and their creditors have lots of non-bankruptcy alternatives available, including raising taxes, raising fees, cutting costs, negotiating payment terms and more. Plus, politicians are often reluctant to have a municipal bankruptcy on their record, which can look bad in future elections.

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Monday, October 11th, 2010

Supreme Court Considers Means Test Case

The Case Ransom v. MNBA appeared before the Supreme Court last week and raised interesting questions about the role of the means test bankruptcy filers must pass in order to qualify for protection under Chapter 7 of the U.S. Bankruptcy Code. Here's a look at what's involved in the case and what it might mean for future bankruptcy filers.

Car Payments and Income in the Means Test

The court case involves the bankruptcy petition of man named Jason Ransom.

  • No car loan: Sources note that Ransom has a car that he owns fully – that is, he is no longer making payments on the vehicle.
  • Ownership deduction: In his bankruptcy petition, Ransom reportedly claimed an ownership deduction of $471 per month for his vehicle.
  • Court rejection: Because he had no car payment, though, the bankruptcy court rejected this deduction in his initial case filing. An appellate court upheld the decision. The Supreme Court must make a final decision.
  • IRS definition: Apparently, both the district court and the appellate court denied Ransom's deduction claim based on the Internal Revenue Service's definition of an allowable deduction for car owners, which limits such deductions to people who are currently making payments on their vehicles.

So the issue at hand is whether or not a Chapter 13 filer (that is, a bankruptcy petitioner who has above-median-income levels and so does not pass the Chapter 7 means test) can keep money each month (instead of paying it to creditors) under the car ownership deduction if he or she is not currently making payments on a car.

Why It Matters: Your Money in Chapter 13 Bankruptcy

The issue may sound fuzzy, but the Supreme Court's decision could have real impact on future bankruptcy cases. Here's a look at why and how.

  • The language of the Bankruptcy Code: While the language of the U.S. tax code is clear that an ownership deduction is only available to those still making payments on a vehicle, the language of the U.S. Bankruptcy Code is a bit fuzzier.
  • The cost of owning a car: As Ransom's lawyers are reportedly arguing, the "ownership deduction" should be available to those who own their cars outright because such vehicles require maintenance and repairs – especially if they're older.
  • The expensive car loan argument: One of the reasons that this issue is so interesting is because it essentially rewards people who have expensive car loans and newer cars and punishes those who are (perhaps more fiscally responsibly) driving older vehicles they've already paid for.
  • The freedom of extra money: If the Supreme Court decides to grant the ownership deduction to people who own their cars outright, it could mean greater financial independence for car owners who file for bankruptcy. Because they'd be able to save more money each month, they could potentially catch up on other payments more easily and possibly even build savings, thus preparing themselves more fully for post-bankruptcy life.

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Posted in Bankruptcy News and Events, Filing Requirements, The Bankruptcy Courts | No Comments »

Sunday, November 1st, 2009

Bankruptcy Median Incomes Change Today

Debtors May Have 21 Days to File Under Old Income Levels

The U.S. Trustee Program and Department of Justice announced new bankruptcy median income numbers for the Chapter 7 means test, which affect bankruptcy petitioners who file on or after November 1.

For debtors who income now falls above the new median income, a 21-day grace period may be granted to file under the previous levels. For more information or to begin bankruptcy proceedings to meet the 21-day deadline, connect with a local bankruptcy attorney.

Median Income Tables

One part of the Chapter 7 means test, introduced in the 2005 bankruptcy reform laws, is to compare the income of the debtor with income levels for similar family sizes in the state. In each state (plus Washington, D.C., Puerto Rico and other territories), there is a set median for families of one-to-four people, plus additional increments for families of more than four.

The median income is the middle point of all incomes for each state and family size—half of families will fall above, and half below, the median income. The provision was introduced to help prevent abuse of Chapter 7 bankruptcy.

Perhaps a sign of the current recession, with unemployment rising and many workers working below full-time hours, median incomes levels in many cases have fallen. However, income levels have also risen in certain cases. For more information, compare the new median incomes with the previous incomes at the U.S. Trustee web site.

Window to File Bankruptcy Under old Incomes

Under the means test, a debtor compares his income to the median for his state and family size; if his income is below the median, he "passes" that part of the test. Debtors whose incomes are above must look at state exemptions to possibly continue under Chapter 7, or must file under a Chapter 13 debt reorganization plan.

In the rare cases where an income level has lowered (such as a single-earner in Maine, which fell from $40,618 to $38,812) and now excludes a debtor whose income falls in that range, the bankruptcy court allows for a brief 21-day window to "pass" the means test under the previous median income levels.

While most income levels only changed a small amount, for those close to the median, the change could be the difference between a debt discharge under Chapter 7 and a 3-to-5 year repayment plan under Chapter 13 bankruptcy.

For more information on the Chapter 7 means test, new median income levels, and if you need to file in the next 3 weeks to qualify for Chapter 7 bankruptcy, visit Total Bankruptcy and connect with an attorney about filing bankruptcy.

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Sunday, May 31st, 2009

Ex-Chicago Bull Bankrupt, Sells Championship Rings

Not so long ago, Randy Brown was a part of the most dominant force in basketball.

Brown, recently dismissed as an assistant coach of the Sacramento Kings, played guard for the ’96, ’97 and ’98 Chicago Bulls.

Those Bulls teams won consecutive championships, due largely to a legendary starting lineup that included Michael Jordan, Scottie Pippen and Dennis Rodman.

Brown was a supporting player, coming off the bench for the Bulls, but his contributions still helped the club achieve a best-ever record of 72 wins and 10 losses in ’96 and Brown received a championship ring each year, the same ring awarded to Jordan, Pippen and coach Phil Jackson.

But not even champions are immune to difficult financial conditions.

Brown filed for Chapter 7 bankruptcy last year, and his championship rings were recently put up for auction.

“It’s a tough situation,” says Dennis West, of West Auctions, the company responsible for the sale.

“Randy seems like a really good guy, and he was a great player. However, these are tough times for a lot of people from a variety of backgrounds. People are making difficult financial decisions, and for some, that means bankruptcy.”

On May 19, the auction began, with the bidding beginning at $19,000.

As a coach, Brown was known for getting the most out of his players and he worked hard throughout the Kings’ recent struggles.

Sacramento in the past five years is about as far from Chicago in the mid-nineties as a basketball player can be, but the assistant coach was well liked by players and fans in both cities.

When the bidding ended, the three rings sold for $58,833.

The winner is currently anonymous, using the online identity of “RingKing.”

Unlike a traditional auction, RingKing will not get to keep his secret—the identity of the winning bidder will be disclosed as part of the public record because the sale took place as part of a bankruptcy filing.

RingKing beat out several other motivated bidders.

One of the finalists was Estee Portnoy, who has served as Michael Jordan’s publicist for many years.

Portnoy’s top bid was $40,000, and she would not confirm that she was bidding on the rings in order to return them to Brown.

“I didn’t have any special motivation,” she said. “I’m just disappointed I didn’t win.”

Brown talked about the impending sale of his rings in an interview with the Sacramento Bee. He admitted that the loss of the rings was harder on him than most people suspected.

“People figure that here’s this guy…he’s played in the NBA, he just got fired, he’s broke, and here he is giving up his championship rings. That hurt me, because those [rings] meant a lot to me.”

The championship rings did not qualify as “essential personal belongings” in Brown’s bankruptcy liquidation, but most individuals going through the process do not have similarly valuable “unprotected” assets.

In any case, the message is clear: bankruptcy offers debtors protection, but often requires them to make difficult choices along the way.

Sources: Chicago Sun-Times, United Press International

Are you struggling to pay the bills? Learn more about filing bankruptcy

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Monday, March 16th, 2009

What Happens to Your Cosigners When You File Bankruptcy?

A cosigner is someone who signs his or her name along with the primary borrower on lending papers and takes on responsibility for payment of that debt should the primary borrow default.

In most cases, a cosigner has stronger credit than the primary borrower and can help that person get better loan terms, like lower interest rates and monthly payments.

Cosigners can be helpful for:

  • Young adults: Often, a parent (whose credit is better established) will cosign a loan for an adult child to help him or her get more affordable terms.
  • Those recovering from bankruptcy: After filing for bankruptcy, you may need someone with stronger credit to cosign a loan with you in order to get reasonable terms.

What happens to cosigners when you file for bankruptcy?

  • In Chapter 7 bankruptcy, many debts are completely forgiven (discharged). This would mean that the burden of payment is removed from you – BUT your cosigner (or “codebtor”) is still responsible for making payments.
  • In Chapter 13 bankruptcy, payments are made according to the terms of a repayment plan. In this case, as long as you keep up with your payment schedule, your cosigners are protected and not responsible for paying that debt.

Other Cosigner & Bankruptcy Considerations

  1. Remember: before you're filing bankruptcy, any payment you miss or make late will harm both your credit and your cosigner’s credit.
  2. Cosigners for business loans are not protected at all by bankruptcy filings.
  3. When deciding which chapter of personal bankruptcy to file, you need to choose the one that will work best for your finances. Although your cosigners could be negatively affected by your decision, they did take on considerable legal responsibility and personal risk by signing the legal documents.

Friend & Family Cosigners & Your Bankruptcy

In many cases, cosigners are close friends or relations. Filing for bankruptcy has the potential to strain these relationships, so it’s important that you take steps to make sure bankruptcy is the right choice for you and the best way to get you back on your feet financially.

Speaking with a bankruptcy lawyer may be a wise first step.

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Posted in Filing Requirements, Finance 101: Secure Your Future, Your Credit Score | 1 Comment »