Bankruptcy Questions Answered

Elliss Bankruptcy a Riches to Rags Story

Financial lessons are often best learned in retrospect, which can make it difficult to tell when you're going down the wrong financial path. Luckily, we can always learn from the mistakes of others.

The Detroit News reports that former Detroit Lions lineman Luther Elliss was forced to file for bankruptcy thanks to a series of bad investments and debts.

While the story is frustrating to hear—Elliss reportedly earned more than $11 million in a five-year period—it is surprisingly common. So how do the once fantastically rich manage to end up in bankruptcy court? Often enough, simply by making some bad decisions.

Elliss, it seems, got sucked into the real estate bubble and ended up with two homes worth less than what he owed on them. Last summer, he and his wife reportedly filed for Chapter 7 bankruptcy to receive a discharge from their debts.

Taking the Long View on Your Finances

While most of us will never command the kind of salaries professional athletes can expect, we would do well to look at how quickly a fortune can disappear.

• Nothing is guaranteed. If the current employment situation has taught us anything, it’s that no job is permanent, but many of us act as if our life circumstances are not subject to change. When making major purchases (homes, cars, schools, etc.) remember that a stretch now could easily become a financial impossibility if your salary changes.
• Listen to the right people. In the Tribune article, Elliss notes that he didn’t listen to suggestions from his wife or adviser—and that it cost him in the long run. Unfortunately, nobody is guaranteed to have your best interests at heart except you, so be very wary when people ask for financial commitments and promise unrealistic returns. On the other hand, know who honestly cares about your well-being and take their advice to heart.
• It's a marathon, not a sprint. Remember that you're in this thing called life for the long haul. There will always be great investments around, so make sure you learn all you can about one—and feel totally comfortable committing to it—before sinking in your hard-earned cash. It's true that you can't win if you don't play, but you also cannot lose.

There's an old bit of financial wisdom that summarizes pretty much every other guideline for handling money: spend less than you make and save the rest. It's easy to get drawn into upgrades and status symbols and all the rest, but at the end of the day (or the lucrative career as a professional athlete), financial stability is often worth the sacrifices of getting there.

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Cash for Cutting Greenhouse Gases

CNNMoney.com reports that a new proposal before the Senate could mean big news for how energy is bought and sold in the U.S. – and for how much average consumers pay.

Proposed Money Saving Measures

Currently, Congress has made little headway toward passing legislation that would limit production of greenhouse gases, despite various attempts. The new bill offers an alternative to the now familiar cap-and-trade model that could potentially lower energy costs for average Americans.

If successful, the measure would work like this:

• Permits required: Each month, coal, oil and natural gas companies would be required to buy permits to sell their greenhouse gas-emitting products to Americans.
• Money comes back: Naturally, higher costs for energy distributors would mean higher prices for consumers, but the proposed measure would return 75 percent of the companies’ fees to consumers. The remaining 25 percent would apparently go to development of sustainable energy sources.

Supporters have reportedly claimed that this cap-and-dividend program, as it’s called, would provide a much simpler way for energy providers to meet new emissions standards than the oft-discussed cap-and-trade proposals would.

Opponents, on the other hand, fear that removing Wall Street investors from the equation would dry up a significant source of revenue that could otherwise be invested in explorations of new technologies.

One of the most easily understandable explanations of the differences between cap-and-trade and cap-and-dividend reportedly comes from an analyst of the energy sector, who noted that this proposed bill would essentially shift money around within the U.S. economy, whereas cap-and-trade could potentially inject new capital.

How Your Energy Bill Could Change

Sources indicate that the rebate part of the bill would likely translate to about $1,100 returned to each household annually. Of course, some of that money would be funneled directly into covering higher energy costs.

But, it seems, as much as 80 percent of the U.S. population would either save money from this proposal or see no change in their expenditures. The other 20 percent, according to CNNMoney.com, would be wealthier consumers who use more energy (in the form of multiple residences, frequent air travel, etc.) and essentially pay for that privilege.

While energy costs are a big part of any budget, these changes shouldn't cause anyone to file bankruptcy.

Because the effects of the bill would vary in each state, you may want to contact your local congressional office for details.

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Big Names File Bankruptcy in 2009

As 2009 winds down, we'll take a quick look at some of the biggest brands and names in business that decided to file bankruptcy.

Big Brand Businesses Filing in 2009:

• Chicago Cubs - The Northsiders briefly entered bankruptcy protection when the team was sold.
• Phoenix Coyotes -The Coyotes are playing on, and playing well, despite failed attempts to sell the team.
• Six Flags -Theme park faced difficulty, but that old guy is still dancing
• Eddie Bauer -Clothing manufacturer sold, but still open.
• Reader’s Digest -Popular magazine still publishing.
• Trump Casinos -Maybe the Donald needs a new apprentice?
• The Philadelphia Inquirer -Rough year for newspapers across the country
• Chicago Sun-Times -Not to be out done by their crosstown rivals at the Tribune, the home of Rogert Ebert filed bankruptcy before being sold.
• Bennigans -The popular restaurant chain closed up shop after filing.
• Charter Communications -One of the country's largest radio station operators - 255 stations across the country.
• Ritz Camera - Still open, but forced to shutter some shops
• Samsonite -Luggage maker and retail store closed some shops, but still operating
• Tavern on the Green -Future of famed New York restaurant still up in the air
• Crabtree & Evelyn -Soap-seller still open
• Filene’s Basement - Deals still available as clothing store purchased and still open
• S&K Menswear -Suit retailer got unbuttoned, future still undecided
• Gottschalks -Department store gone for good
• Southern Voice – Large gay magazine in Atlanta quickly folded up
• New York Off Track Betting Corp -State-run betting offices muddied in debt
• Steak & Ale Restaurant and Roadhouse Grill -Steakhouses across the country got burned during the recession

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The Biggest Business Bankruptcy Filings of the Decade

This was a banner decade for big bankruptcy.

Of the 20 largest corporate bankruptcy filings in history, all but three of them occurred in the last decade.

The 2000s featured three businesses with more than $100 billion in assets filing for bankruptcy. All the companies in the list here held more than $30 billion in assets.

Combined size of the biggest companies filing bankruptcy this decade: $1.5 trillion. That would make them the 10th richest country in the world with a greater GDP than Canada, India, Mexico, Australia and most of Europe.

The Biggest Business Bankruptcies of Decade

Pacific Gas and Electric: $36.1 billion
April 2001
The story: After California deregulated the state’s energy industry, the state entered an energy crisis as companies couldn’t sell energy for more than they paid for it. Pacific Gas and Electric began taking on debt as Californians experienced rolling blackouts across the state. The company was bailed out by the state government, which provided cash for the company during its reorganization. While this move saved the company, it did add to the long list of budget problems still plaguing the state.

Enron: $65.5 billion
December 2001
The story: At one time Enron was one of the world’s leading energy companies, a blue-chip stock, and regularly lauded by the business world. But all of that began to unravel in the late 1990s as a massive accounting fraud and insider trading scandal was unveiled. Enron had been hiding losses in offshore companies for years, and falsely inflating their stock. When this knowledge became public, the company was forced to file what was then the largest bankruptcy filing in history.

WorldCom: $107 billion
July 2002
The story: In 2002, WorldCom was the second largest long distance phone company, but nearly $4 billion in billing fraud led to what was then the largest bankruptcy in US history. Following bankruptcy, the company changed its name to MCI and was later purchased by Verizon in 2005.

Conseco: $61.4 billion
December 2002
The story: A large insurance company based in Indiana, Conseco launched a financial arm of the company in the late 1990s with the purchase of a leader in the mobile home financing industry. The move proved costly, and led to bankruptcy reorganization early this decade. The plan worked in the short-term, and Conseco emerged ready to do business again, although late this year new financial concerns may be appearing.

Lehman Brothers: $691 billion
September 2008
The story: The Lehman Brothers bankruptcy filing is far and away the largest by an American corporation in history. Founded more than 150 year ago, it eventually grew into the third largest brokerage firm in the country, and the largest mortgage underwriter. The firm made a fortune during the housing boom earlier this decade, but was at the center of the subprime mortgage collapse. After a frantic search for buyers that turned up empty, and no help from the US government, Lehman collapsed. The company has continued to be in the news as bonus paychecks for executives at the firm have triggered outrage and scrutiny.

Washington Mutual: $327.0 billion
September 2008
The story: Another victim subprime mortgage victim in September of 2008, WaMu burst as quickly as the housing bubble that helped it grow into one of the largest banks in the country. But after the Lehman Brothers collapse, customers made massive withdrawals at WaMu for fears it would soon fold, too. The government quickly took over, and forced a sale to JP Morgan Chase, marking WaMu’s fate as the largest bank failure ever in the US.

Chrysler: $39.3 billion
April 2009
The story: Though not the first car company hit by weak sales and high loses, Chrysler was the first American automaker to file bankruptcy since Studebaker in 1933. The company was reorganized through bankruptcy and government invervention that led part of the company to be acquired by the United Auto Workers Union and another portion to be sold to Italian company Fiat.

Thornburg Mortgage: $36.56 billion
May 2009
The story: Thornburg specialized in “jumbo” adjustable rate mortgages: Those worth more than $400,000. But, as the value of these mortgages fell along with mortgage values across the board in the middle part of this decade, Thornburg was one of many mortgage companies with a bankruptcy case in the $30 billion range. Although the company officially entered Chapter 11, it sold its assets and was officially closed.

General Motors Corporation: $91 billion
June 2009
The story: The beleaguered car company was forced into bankruptcy earlier this year as the federal government poured in billions of dollars to keep the company afloat. The auto-maker’s executives had asked the government for financial help and declared they were close to insolvency. But in exchange for financial support, the feds wanted GM to be reorganized in Chapter 11. The bankruptcy led to the closing of brands Saturn and Pontiac; Hummer was sold to a Chinese company; and the future of Saab is still up in the air.

CIT Group: $71 billion
November 2009
The story: CIT Group is one of the largest commercial lenders in the country, specializing in loans to small and mid-size businesses. But they lost $3 billion over two years, and continued to struggle despite receiving billions in cash and loans from the federal government and other lenders. Despite plans to emerge quickly, their bankruptcy raises questions on how small businesses, including 2,000 vendors supplying goods to 300,000 stores, will be affected.

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Call Your Representative and Demand Mortgage Modification in Bankruptcy

An amendment being debated in the House of Representatives could provide powerful protections for homeowners going through bankruptcy. This legislation would allow bankruptcy judges to modify mortgages in Chapter 13 cases, providing a huge benefit for everyday hardworking Americans who are facing home foreclosure. The House may start voting on this amendment as soon as today!

Please take the steps below then share with your family and friends via email, Facebook, or any way you can get the word out!

1. Phone toll free at: 877.354.4958
2. Put in your zip code
3. When you reach the receptionist:
   • State your name
   • Say that you are a constituent
   • Ask the Representative to vote FOR the Conyers-Turner-Lofgren amendment (#201) to the Financial Services Reform bill.

The amendment is being fiercely opposed by the business and financial services communities. By calling your representative in support of this amendment, you can fight corporate greed and help your fellow Americans. This amendment will cost taxpayers NOTHING and will save millions of homes from foreclosure! Take action today!

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Bankruptcy Rate Drops in November

The number of Americans filing bankruptcy fell in November, according to the American Bankruptcy Institute, but the number remains above last year's filings.

A total 112,152 consumer bankruptcy petitions were filed in November, down 18% from the 132,749 filed in October. Even though the U.S. Courts were open fewer days in November, the number shows the bankruptcy rate slowing, though moderately.

The average daily filing was 6321 in October, and 5903 in November.

Still, the November statistic remains 12% above the November 2008 bankruptcy figure, when 99,925 consumers filed.

A chart at the Calculated Risk Blog predicts that total filings for the fourth quarter of 2009 will come in slightly below Q3. If December continues the downward trend, it would be the first time that quarterly filings decreased since the new bankruptcy law took effect in the third quarter of 2005.

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Student Loan Bankruptcy Case Argued in Supreme Court

The U.S. Supreme Court began hearing today the case involving a debtor whose student loans were discharged in a Chapter 13 bankruptcy—though possibly against the U.S. Bankruptcy Code.

Student loans are notorious for being difficult to discharge in bankruptcy, even in a Chapter 13 bankruptcy. In order to have student loan debt eliminated, a debtor must prove undue hardship.

In the case before the Supreme Court, the debtor, Francisco Espinosa, was allowed to enter a Chapter 13 plan without ever proving undue hardship to the bankruptcy court, according to a story on National Public Radio.

The Bankruptcy Case

In 1988, Espinosa was a baggage handler for America West Airlines when he began taking computer drafting classes at a technical school. Espinosa took out four student loans totaling over $13,000 from United Student Aid Funds.

After earning his degree, Espinosa was unable to find work in the computers field, and continued working at America West. However, that company was facing its own financial strain, and began cutting salaries. In 1992, Espinosa, a college graduate earning $6 an hour, filed bankruptcy.

According to the NPR story, Espinosa agreed to repay the full amount of the student loan debt through a three-to-five year Chapter 13 plan—but not the $4,000 of interest accrued on the loan. USAF was notified several times of the terms of the plan, and never objected to the case.

In 1997, the bankruptcy court declared Espinosa's debt repaid, and issued him a debt discharge.

However, two years later, USAF issued a lien on Espinosa's tax return for the unpaid interest. USAF claimed that the bankruptcy plan was illegal—11 years after the court confirmed it—because of the undue hardship requirement.

Undue Hardship Hearing Never Held

The student loan company argues that the bankruptcy court should have held a special hearing to determine whether Espinosa's situation qualified as an undue hardship, and should have summonsed USAF to appear in court. Because the hearing was never held, undue hardship was never established, and the loan should not have been dischargeable, USAF argued.

Espinosa's attorney has argued that USAF was properly notified and did not raise any objections at the time. A federal appeals court agreed.

Now it's up to the Supreme Court to decide just when a creditor can raise objection to a Chapter 13 bankruptcy plan—and when the can still collect on debts.

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New Bankruptcy Chapter Proposed by Congress

A new amendment to the U.S. bankruptcy code could help troubled financial institutions reorganize their debts more effectively and eliminate the status of "too big to fail" that has prompted government intervention over the past two years.

H.R. 3310, introduced by Rep. Spencer Bachus (R-AL), is called the Consumer Protection and Regulatory Enhancement Act, and would create a Chapter 14 bankruptcy under which institutions to file bankruptcy without disrupting the nation's financial stability.

The bill is in response to the government's inconsistent reaction to the collapses of financial holding companies such as Lehman Brothers, Bear Stearns and AIG.

At the American Bankruptcy Institute's 2009 Legal Symposium in Washington, D.C., this week, Congressional staffer Daniel Flores spoke on a panel about the need for the new chapter, according to Reuters.

"No one trusts the bankruptcy bar and the courts. That's the problem," said Flores. "We don't need to abandon bankruptcy, we need to abandon government intervention that can seem inconsistent and panicky."

Most importantly for taxpayers, he bill would completely remove the option for government bailouts, leaving troubled businesses with no other safety net besides bankruptcy.

Rep. Bachus' bill, which is currently under committee consideration, would have no effect on consumer bankruptcy laws.

If passed it would be the first amendment to U.S. bankruptcy laws since the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005.

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The Year of the Prepackaged Bankruptcy

2009 has seen a dramatic rise in so-called prepackaged bankruptcy filings that streamline the bankruptcy process for large companies, according to a recent report from Reuters.

Companies filing for traditional bankruptcy can find themselves going through several years of Chapter 11 bankruptcy filing, which can interrupt business and create uncertainty.

Instead, in a prepackaged bankruptcy, companies can agree upon and arrange reorganization plans with their creditors before actually filing for Chapter 11 bankruptcy. Creditors have sometimes even voted on the prepackaged plan before it is filed.

The prepackaged bankruptcy is a form of agreement that is even more accelerated than a pre-negotiated bankruptcy in which companies and creditors agree on some but not all stipulations of the plan.

Prepackaged Plans Increase 300 Percent

There have been 30 prepackaged bankruptcies this year, the Reuters report notes—a 300% increase from just 10 such arrangements in 2008. With 164 companies that have public equity and debt who have filed for Chapter 11, the prepackaged bankruptcies represent 18% of the total number filed.

The much-publicized CIT Group Inc bankruptcy was arranged with a prepackaged bankruptcy agreement, as were those of other troubled companies like Six Flags Inc, Charter Communications Inc, Panolam Industries International Inc and Lear Corp. According to Reuters, the 30 prepackaged bankruptcies in 2009 represent some $124 billion in assets.

Fast Filings in Prepackaged Bankruptcy

With the prepackaged bankruptcy, companies can turn around a Chapter 11 filing in a matter of months, even when dealing with a huge company like CIT and its $80 billion in assets, which expects approval of its bankruptcy filing in December, a mere month after filing.

The results are less uncertainty about what the terms of the bankruptcy will be, and less disruption of the business in question.

Six Flags Inc, the world’s largest regional theme park operator, filed for bankruptcy in mid-2009, and continues to negotiate a finalized plan. Robert Rossiter, the Chief Executive of Lear Corp., which makes automotive seats and electronics, recently said in a statement that Lear Corp. had moved through the financial restructuring process without missing a beat operationally.

According to Reuters, the traditional Chapter 11 filing, without a prepackaged bankruptcy, is now often referred to as a free fall.

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Orlando Shooting Suspect Had Recently Filed Bankruptcy

The suspect in the shooting in Orlando last week that left one dead and six injured had a checkered financial past—including unemployment and a recent bankruptcy filing.

In 2007, suspect Jason Rodriguez was fired from engineering firm Reynolds, Smith & Hills, the location of the shooting, according to The New York Times. According to Rodriguez's public defender, he believed his former employers were blocking his attempts to receive unemployment benefits.

Rodriguez filed Chapter 7 bankruptcy in May, 2009, listing assets of $4,675, mostly from an unreliable 2002 Nissan XTerra, and debts at $89,873.31, including child support, back taxes and student loans.

At the time of his bankruptcy filing, Rodriguez was working at Subway as a "sandwich artist", but recently quit the position due to shortage of hours, according to CNN.

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