Tuesday, February 16th, 2010
It is commonly known that filing for bankruptcy can be a very trying and emotional time for those filing. But it is less common to hear about how a bankruptcy can impact the children of bankruptcy filers. If you have children or dependents and are considering bankruptcy, it is important that you understand the potential consequences bankruptcy can have on your children.
1) Unfortunately, if a debtor contributes money towards a child's college tuition or to a college fund, filing for
bankruptcy could potentially prevent these contributions from occurring. When you file for bankruptcy, the court and creditors will attempt to limit the amount of your expenses and may prioritize their collection accounts above your child’s education. While bankruptcy courts will allow necessary expenses such as housing, utilities, and food, your child’s education may not be viewed as essential. If you find yourself in this situation, I strongly recommend that you consult with a bankruptcy lawyer to understand more about how your child’s education may be affected when filing for bankruptcy.
2) When you file for bankruptcy, the line can get blurred between your assets and your child's assets. For example, say you opened a bank account for your child but failed to take the adequate steps to set it up correctly to be protected from something like a bankruptcy. When it comes time to file bankruptcy, you may run the risk of the money in that account being considered your money and not your child’s. This type of problem can occur if the account is under just your name (and not your child’s) or if you have ever used it to pay your own bills. Your children’s assets can be better protected from bankruptcy if the accounts are opened under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). If your child’s assets are at risk of being affected by bankruptcy, I again recommend consulting a bankruptcy lawyer to help find the best means of fixing this problem.
3) Children are protected from bankruptcy whether or not an in-debt parent is behind on child support payments. Child support obligations are a top priority and are ineligible for bankruptcy debt discharge. If you file for Chapter 7 bankruptcy, child support payments become a top priority when assets are being liquidated. If you file for Chapter 13 bankruptcy, child support payments will be arranged in the repayment plan. In either case, the hope is that ex-spouses find it easier to pay child support since the bankruptcy may be able to lessen many of their other debt burdens.
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Sunday, September 20th, 2009
Kwame Kuadey asked: What happens to gift cards when a company goes bankrupt? Can a company refuse to redeem outstanding gift cards during bankruptcy? Does it matter whether the company declared Chapter 11 or 7 bankruptcy? Is there federal or state law regarding bankruptcy and gift cards? All these questions are the subject of this article.
Before answering the questions above, it is important to explain the difference between Chapter 11 and Chapter 7 bankruptcy. A company typically files for Chapter 11 bankruptcy protection when it wants to work with creditors to change the terms of its debt obligations and restructure its business in order to emerge from bankruptcy as healthy company. A Chapter 7 bankruptcy involves the liquidation of assets to pay creditors. When a firm files for a Chapter 7 bankruptcy, the company is going out of business and would typically close all stores.
However, a company planning on liquidating can also file a Chapter 11 bankruptcy protection, as in the case of KB Toys Inc, which filed for Chapter 11 bankruptcy protection in December 2008 even though the company plans to liquidate its entire business and close all stores. A company would typically file a Chapter 11 to liquidate in order to gain more control as it sells off assets. Therefore, for this article, what is important is whether the bankruptcy is to reorganize or liquidate, rather than whether it is a Chapter 7 or 11.
The decision to honor gift cards during bankruptcy, regardless of whether it’s a reorganization or liquidation is the sole decision of the company, with approval from the judge overseeing the bankruptcy. After the bankruptcy is filed with the court, the company will file what is called “first-day motions”, which seek approval from the judge on issues like how the company plans to pay its workers, including whether it plans to honor gift cards. Gift Card redemption requests are typically approved by the judge, although the judge may deny them for whatever reason.
Therefore, when a company decides not to honor gift cards during bankruptcy, it is because they either decided not to petition the judge for approval to do so, or the request was denied by the judge. Generally, it is more of the former than the latter. Considering the fact that some companies go into bankruptcy with millions in outstanding gift card obligations, a company should expect consumer backlash and pressure from politicians if it decides not to honor millions in gift cards during bankruptcy. This happened to the Sharper Image when it initially decided not to honor about $20 million in gift card when it filed for bankruptcy liquidation in early 2008. After pressure from both consumers and a number of state Attorney Generals, the company relented and allowed gift card holders to redeem their gift cards if they purchased goods worth twice the value of their gift cards.
Companies that file for bankruptcy reorganization have several incentives to redeem gift cards during the reorganization. First, the last thing a company planning to stay in business wants to do is upset current customers, and refusing to redeem gift cards is a sure way to do that. Second, gift card holders typically spend more than the gift card value. So redeeming gift cards during a tough time helps the company boast sales. Third, it prevents competitors from stealing customers. When The Sharper Image initially refused to honor gift cards during bankruptcy, competitor Brookstone saw and opportunity to gain more customers by offering Sharper Image gift card holders attractive discounts if they surrendered their gift cards to Brookstone. Finally, honoring gift cards during bankruptcy helps to project a “business as usual” image, which is what a company planning to stay in business should hope to project to its customers.
Companies that file for bankruptcy liquidation have less of an incentive to redeem gift cards, since they don’t plan to stay in business. However, there are a number of reasons why it is a good idea to honor gift cards during liquidation. First, it is the right thing to do. Consumers purchase gift cards with the hope that they or their recipients will be able to redeem them during a reasonable timeframe. Refusing to honor gift cards breaks this trust and makes the gift card holders victims of unfair business practice. Second, buy honoring gift cards during the get-out-of-business sale, the merchant will be able to move inventory quickly since gift card holders typically spend as much as 20% more than the card value. This then becomes a win-win situation for both parties.
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