Bankruptcy Questions Answered

Does Your Landlord have any Obligations to Mitigate Damages if You Breach Your Lease?

Not surprisingly, I get calls from small business owners who are contemplating personal bankruptcy when their businesses fail.  There are many issues that arise in these types of cases but I would like to focus on one problem that, more than any other, can force the business owner into bankruptcy.

Generally when the owner of a small business leases retail space, the landlord will demand a personal guarantee.  This means, of course, that in the event of a default, the business (which may be a corporation or LLC) faces liability and the business owner personally faces liability.

Given this reality, every small business owner should seek counsel to discussion asset protection options before starting his business, but that is a topic for another day.

If the business fails you might be surprised to learn that the landlord does not necessarily have to take any steps to "mitigate damages" by releasing the retail space.  Instead, the landlord can demand payment for the full value of the lease from the business owner personally.  If the business owner has a house with $100,000 of equity, that equity is therefore at risk, and given that Georgia's bankruptcy exemption statute is stingy ($10,000 for an individual or $20,000 for a married couple filing jointly), bankruptcy may not offer much protection.

I ran across two helpful resources that go into more detail about the landlord's obligations or lack thereof.  The first is a blog post from Atlanta lawyer David Pardue in his Georgia Real Estate Litigation blog.  In his post, David discusses a recent Georgia Court of Appeals case called Sirdah v. North Springs Assocs., LLLP, which was decided by the Court of Appeals in June, 2010.  In the Sirdah case, the Court restated its previous holding that a landlord is under no duty to mitigate damages unless (1) the landlord accepts the tenant's surrender, or (2) the tenant successfully terminates the lease.  In the Sirdah case, the tenant returned his keys to the landlord and argued that by accepting the keys, the landlord accepted the tenant's surrender.  The Court said that accepting the keys did not constitute an acceptance of the surrender.

Another helpful resource is a more extensive article written by attorney Stephanie Everett of the Bloom Law Firm in Atlanta.  In this paper, Stephanie examines the various scenarios that could arise when a tenant breaches a lease and the resulting consequences.  Although Stephanie's article is written for the benefit of landlords, tenants will find the information very helpful as well.

As the law in this area could change, you should not rely on these resources in the absence of counsel.  If you are a small business owner and you are coming to the realization that your business may not survive, you would be wise to consult with a lawyer to discuss your options both in business and in terms of bankruptcy.  I have seen far too many business owners who simply left and discovered after the fact that their bankruptcy options were limited, or too painful.

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Consumer Borrowing, Retail & Median Home Prices Boost Economy

Government groups have published numbers for various economic indicators for March and April, giving a little insight into how our nation’s economic situation is changing. Here’s a summary of a few of these telling figures.

Consumer Borrowing Up in March

Since February of 2009, consumer borrowing in the U.S. has reportedly been falling, as we collectively try to claw our finances out of the red.

But March 2010 showed a surprising increase in consumer borrowing—a $1.95 billion increase, according to sources, which far outstripped the $3.85 billion loss many experts expected.

The increase could be a fluke, but it could equally be a sign that American households are becoming more optimistic about spending money.

Retail Rises Slightly in April

Retail sales blossomed in March, thanks in part to an early Easter. April’s numbers represent smaller growth, but growth nonetheless:

• March retail sales saw a 7.9 percent increase over sales in March of 2009.
• April retail sales grew only 0.5 percent compared with those a year earlier; however, in April 2009, sales decreased 2.7 percent from the previous year.
• Combined sales in March and April increased by 4.8 percent; January and February sales increased by only 3.3 and four percent.

While the slower growth in April may seem like cause for concern, many analysts are not worried, pointing to the fact that some growth occurred and that this year’s early Easter likely shifted people’s shopping patterns.

And, as one commentator in this New York Times article notes, economic recoveries don’t always happen linearly.

Median Home Prices

NPR reported this week that median home prices are on the rise in about 60 percent (91 out of 152) of the country’s cities surveyed.

This marks significant improvement from the final quarter of 2009, when only about 40 percent of median home prices were rising. Here’s a look at some of the hard numbers:

• 36 percent of all first-quarter sales were foreclosures and other distressed properties;
• Nationally, the median price was $166,100, about 0.7 percent below the median price in the first quarter of 2009;
• Prices jumped significantly in Saginaw, MI; Akron, OH; and Cleveland, OH; and
• Prices fell significantly in Orlando, FL; Ocala, FL; and Cumberland, MD.

Posted in Bankruptcy and the Economy, Credit, Economy, borrowing, housing, retail | Comments Off

Personal Finance News Roundup: 12/12/2009

This week, many November numbers about money and credit were released, with some surprising findings. Here’s a summary of a few important figures.

November Consumer Bankruptcy Filings Down 18 Percent

The American Bankruptcy Institute (ABI) reports that personal bankruptcy filings decreased 18 percent last month, compared to October’s numbers. Specifically:

• Total filings: 112,152 consumers filed for bankruptcy in November 2009, compared with 135,913 in October.
• Increase from 2008: A year ago, in November 2008, 99,925 consumers filed for bankruptcy. This year’s figure represents a 12 percent jump.
• Chapter 13 filings: Only 29 percent of consumers who filed for bankruptcy did so under Chapter 13 of the U.S. Bankruptcy code last month, a rate unchanged from October.
• Yearly estimate: Sources predict that total bankruptcies in 2009 will total more than 1.4 million.
• Rate of cyber fraud: Of all online sales, 1.2 percent were found to be fraudulent in 2009, the lowest figure recorded in the 11 years CyberSource has been keeping track.
• Online revenue lost: This year, $3.3 billion was lost to cyber fraud, compared to $4.0 billion last year and $3.7 billion in 2007.
• Some areas still problematic: Online sales of electronics still have fraud rates approximately double those of other retailers.

Retail Sales Drop Surprise 0.3 Percent in November

However, this figure is not considered comprehensive, and will be reevaluated after the government releases its sales data on December 11th. Still, the initial figure has some retailers worried that this year’s holiday shopping season will mirror last year’s, when many Americans were holding onto their money after the tumult of the stock market’s crash.

The retail figures, quoted in this msnbc.com article, apparently don’t include online sales, sales from electronics chains or sales from Wal-Mart Stores, Inc., three groups the government’s figures will cover.

Report: Online Fraud Down Overall

In a survey out this month on online scams, the security company CyberSource reports that web fraud has decreased by about 18 percent in the United States in Canada since 2008. Here’s a closer look at the findings:

• Rate of cyber fraud: Of all online sales, 1.2 percent were found to be fraudulent in 2009, the lowest figure recorded in the 11 years CyberSource has been keeping track.
• Online revenue lost: This year, $3.3 billion was lost to cyber fraud, compared to $4.0 billion last year and $3.7 billion in 2007.
• Some areas still problematic: Online sales of electronics still have fraud rates approximately double those of other retailers.

The dip in fraud doesn’t mean you should be any less vigilant when shopping online, though. Be sure to guard your credit card numbers carefully and only shop on secure web sites!

Additional Resources

2009 Online Fraud Report (PDF)

Posted in Bankruptcy, Bankruptcy and the Economy, Fraud, retail, statistics | Comments Off

Federal Reserve Proposes New Limits on Store Credit Cards

According to the Wall Street Journal, the Federal Reserve has proposed new regulations that would restrict retailers' ability to issue store-specific credit cards. Many major retailers, it seems, are not happy about the prospect.

Prove You Can Pay

The new proposal, if adopted, would require store-card applicants to prove their ability to pay their bills when they apply for their cards. Many commentators believe this would amount to presenting a pay stub before being able to fill out a form.

• Based on the Credit CARD Act: One provision of the Credit CARD Act of 2009, set to take full effect in February 2010, requires lenders to verify that borrowers are capable of repaying loans before lending money. The proof of income requirement for in-store cards is, apparently, an application of this provision.
• Displeasure from retailers: Perhaps unsurprisingly, retailers are less than thrilled about the potential for this rule to change the way they operate. Many retailers currently offer tempting incentives to shoppers to open store cards, including one-time discounts and rewards programs.
• Support form consumer advocates: On the other side of the coin, though, those concerned primarily with consumer rights have hailed the proposed measure as an important move toward limiting too-easy credit.

How Well Do We Pay?

So how likely are Americans to default on their store-specific cards? Sources indicate that store-branded (also called private-label) cards tend to be higher than general purpose plastic.

This makes sense: if you’re struggling financially and only able to make payments on some of your cards, it’s smarter to stay current on cards that can be used at a variety of locations rather than on one that’s only good at a single retailer.

But, it seems, even this less-than-stellar track record doesn’t make retailers eager for a change. Here’s why:

• Sales volume: WSJ reports that Macy’s, one major retailer that issues a store card, saw more than half of all its sales bought on store cards in Q3 of this year.
• Salary is a private matter, and few Americans are likely to be comfortable with handing evidence of their income to a stranger behind a register, no matter how much they make.

The Federal Reserve has not yet announced when this proposed rule will be completed.

Additional Resources

Credit CARD Act of 2009 (PDF)

Posted in Bankruptcy and the Economy, Federal Reserve, credti cards, retail | Comments Off