By Gerri Elder
Due to the nation's poor economy, more and more individuals and businesses are filing bankruptcy.
A new Target 5 report by WMAQ News examined what happens to consumers when a business they have already paid for goods or services folds before delivering.
Many people who have found themselves in the situation of having paid a business that has filed bankruptcy and closed up shop have questions about what they can do to recover their losses.
Douglas Baird, a law professor at the University of Chicago, says that in many cases there is nothing the consumer can do but accept the fact that they have lost the money paid to the bankrupt business.
Baird makes an interesting point that many consumers don't realize: when you make a deposit, you are essentially making a loan to the business.
If the business then files bankruptcy without any goods or services being delivered, it is the consumer who loses as the business defaults on the loan.
During the first quarter of 2008, approximately 8,700 businesses filed bankruptcy. This was almost a 40 percent increase in the number of businesses filing bankruptcy during the same time period of the previous year.
When a business files bankruptcy, all of its assets are immediately frozen and any consumers who are owed refunds of their deposits have to get in line and compete with other creditors for any cash that is available to pay the debts.
Consumers who have paid deposits are only paid after all of the secured creditors and bankruptcy lawyers' fees are taken care of, but before tax collectors.
There's a good chance that no money will be left to repay the consumer deposits though, and most people have to simply take the loss.
Some companies shut their doors without notice and without filing bankruptcy.
These companies simply pack up, close down or leave town and customers who have pre-paid for services or products are left holding the bag.
If a business fails and does not go the route of filing bankruptcy, a consumer may have legal rights to sue them for the losses, but as the saying goes, you can't get blood from a stone.
If the company has no assets, a consumer's legal standing doesn't make a lot of difference. There would be no recovering the losses even if a legal win was achieved, so many people don't bother with the exercise in futility that filing a lawsuit would be.
It is recommended that consumers pay deposits by using credit cards rather than writing a check.
With a charge on a credit card, the Fair Credit Billing Act allows consumers to dispute charges with the credit card issuer and have the debt removed from their account.