In Focus: Post-bankruptcy Credit Repair

Although filing for Chapter 7 bankruptcy can eliminate most of your debts and allow you to make a fresh start, it will also have a long lasting impact on your creditworthiness. Did you know that a bankruptcy discharge will remain on your credit report for ten years? Nonetheless, an experienced bankruptcy attorney can advise you on all of your options. In the meantime, this article is a brief discussion on the steps you can take to restore your credit rating.

Credit Restoration: 101

Although there are many reasons why people go bankrupt, including loss of a job, divorce, and unexpected medical crises, people who are facing insurmountable debts often spend beyond their means. With this in mind, it goes without saying that it is crucial to develop and maintain better spending habits.

It is worth noting that those who intend to file for bankruptcy are required to attend and complete credit counseling through a court-approved program. These courses provide information and training on creating a budget and understanding income and expenses.

While you are in bankruptcy, it is crucial to live within you means and maintain a budget.
By tracking your spending, you can figure out ways to cut your expenses. Some of your options include using coupons, purchasing generic or bulk items, and most of all, curtailing unnecessary shopping.

Once you’ve established a budget, it is important to start saving money. In short, the rule of thumb is to save 10 percent of your income. The objective is to create a “rainy day” fund to cover living expenses for 6 months in the event of unexpected events, such as a job loss, sustaining an injury in an accident, or suffering a serious illness.

Finally, it may be possible to start rebuilding your credit by obtaining a secured credit card. Generally, these cards require that you deposit money as security, with the amount of the deposit being the amount of the credit line. By carefully using the secured card and making monthly payments on time, you can begin rebuilding your creditworthiness.

The Takeaway

In the end, filing for bankruptcy is a serious consideration that requires the advice and guidance of an experienced bankruptcy attorney. Nonetheless, you can get back on your feet before your bankruptcy is discharged by taking steps to rebuild your credit rating,

What’s Going on at Toys “R” Us?

Last month we blogged about the Toys “R” Us bankruptcy and explored how one company’s bankruptcy can ripple through an entire industry. This month we are checking in on this interesting bankruptcy again because the company’s general counsel has resigned, and the company is asking the bankruptcy court for permission to pay out big bonus to its top executives.

Resignation

Earlier this month, Toys “R” Us announced that is general counsel was stepping down after just 10 months on the job. It is not unusual for high level executives to move after a bankruptcy filing, but this departure is raising some eyebrows.

Bonus Season

One of the common misconceptions about the bankruptcy process is that it limits executive pay. While there are limitations are the amount of money that can be offered to top executives to get them to stay with the company while it goes through the bankruptcy process, there are basically no other restrictions.

It was recently revealed that Toys “R” Us paid CEO David Brandon $2.8 million as a retention bonus just before filing for Chapter 11. That money is not being clawed back, and the bankruptcy court is being asked to approve even more bonus money. The company is asking the court to green light end of the year bonuses of over $90 million. It plans to give Brandon another $12 million, give 16 other top executives $20 million, and give its lower level employees $60 million.  

There is no reason to think the bankruptcy court will not approve this plan if the company has the cash to make it happen. Bonuses are a part of doing business, even when business isn’t doing well.

The Rumor Mill

It is going to be interesting to see how Toys “R” Us and the rest of the toy industry do this holiday season since things have been so unsettled for the last quarter. All the companies have been staying positive, which is important since negative rumors pushed Toys “R” Us to file sooner than it probably would have otherwise.

As the Financial Times reports, Toys “R” Us had to rush to file for bankruptcy after word got out that it was having financial trouble and its suppliers stopped shipping some orders or asked for cash on delivery just as it was preparing for its busiest season. This goes to show you just how important it is to work directly with suppliers if you are having financial trouble. Nobody wants to find out that a business they work with is on the brink of bankruptcy from a talking head on cable tv.

Get Help

If you need help steering your business through a financial crisis, don’t hesitate to reach out to an attorney as well as to your financial advisors. Our firm regularly helps businesses navigate staffing issues and renegotiate contracts or debts. We are also relied on by business owners who are trying to figure out if they should file for bankruptcy.

Are You Sure You Know The Priority Of Your Debt?

In Monty Python and the Holy Grail, some villagers claim to have found a witch, which they would like burn at the stake. They ask Sir Vladimir for permission to burn her, but he wants to know how the villagers know the woman before him is a witch before he consents to her burning. After a bit of prodding, the villagers admit the dressed the woman up like a witch and made her wear a fake nose. But they insist she does have a wart.

A bit of “scientific reasoning” then takes place, and it is determined that the woman weighs the same as a duck, so she can float on water, and thus is made of wood, which we all know is what witches are composed of since they burn.

We were reminded of this scene when reading a recent bankruptcy opinion from the 2nd Circuit Court of Appeals. There is a lot of other stuff going on in the case, but since we frequently work with creditors, what struck a chord with us was the court’s discussion of debt priority.

When a company declares bankruptcy, the court must figure out who gets what when any remaining assets are distributed. Debts are prioritized, and the higher the priority a debt is, the more likely it gets paid back. For example, first-lien secured bonds are superior to second-lien secured bonds, are superior to senior unsecured bonds, are superior to subordinated unsecured bonds, are superior to preferred stock, are superior to common stock, etc.

One cannot come in claiming that the title at the top of a document completely determines what type of debt it is and what priority it gets during a bankruptcy. That is like the villagers dressing up the woman as a witch to make their case against her stronger. It is necessary to do a closer examination of the details of the agreement to determine what exactly it is.

However, the court went a bit overboard in deciding that the terms of the subordinated notes in the case at hand were basically ambiguous. Parties need to have some certainty that their intentions about the priority of debt be respected. Wiggle room is not necessarily something lenders or debtors want in this area of the law.

 

110,000 Travelers Stranded Abroad After Airline Declares Bankruptcy

Although other countries have attempted to emulate the American bankruptcy system, few can replicate it. Consider the recent bankruptcy of Britain’s Monarch Airlines. The company collapsed so suddenly and completely that 110,000 travelers were stranded abroad, and the government had to charter special flights to bring them home.

While it is possible that something like this could happen to an American company, it is rather unlikely. Even businesses that face a very bleak financial future can use our country’s bankruptcy system to wind down operations rather than halt them abruptly.

Under United States law, troubled businesses can also avoid shutting down by going into receivership. Receivership is a close cousin to bankruptcy in that it allows a troubled company to keep operating as it looks for a buyer or winds down operations. As a bonus, it is generally faster and cheaper than going through bankruptcy, while still offering the company an opportunity to get a business’s fiscal house in order.

Receiverships are not voluntary. Instead of a company filing for receivership, a creditor can ask the court to appoint a neutral third party called a receiver to take over a debtor’s company and keep it running long enough to pay off the creditor.  

Instead of liquidating all assets like would be done in a bankruptcy, a receiver can help a company seek buyers who are willing to pay top dollar for part or all of the business. The fact that a business in receivership is being overseen by a neutral third party also reassures those the troubled business is working with, so additional credit is often offered as deals are renegotiated.  

Receiverships are also a good option when a creditor suspects the debtor company is committing fraud, has breached their fiduciary duties, or is operating a Ponzi scheme. The receiver is a neutral third party, so they can step in and help victims of the debtor by keeping the business running or by preserving assets while a criminal or civil investigation is ongoing.

There are people that specialize in being receivers and helping turn companies around or wind them down. Our firm helps businesses find such people, and advises such people on legal issues in the companies they are overseeing. We also work with businesses who are in receivership.

Bankruptcy’s Ripple Effect

We often warn that one business filing for bankruptcy can spark a chain reaction. We are seeing this bear out in the Toys “R” Us bankruptcy. The entire toy industry is in a tight spot because of the retailer’s decision to file for bankruptcy.

According to the Washington Post, “Toys “R” Us owes $7.5 billion to a group that includes virtually every major toymaker in the country: Mattel (owed $136 million), Hasbro ($59 million), Spin Master ($33 million), Lego ($32 million), Radio Flyer ($12 million), Crayola ($2.6 million).”

These and other toymakers must now decide what their relationship with the last “big box” toy store will be like going forward. Some of the bigger companies are reducing the orders they will ship to Toys “R” Us or asking for cash on delivery. Others are optimistic that a restructuring will make the company stronger than ever and help it compete in the digital era. Some smaller companies have chosen to cut ties with the retailer. And everyone is looking ahead to the holiday season, when Toys “R” Us takes in 40% of its yearly profits.

What Toys “R” Us’s suppliers decide to do will have a huge impact on the company’s ability to make it through the Chapter 11 process successfully. If the suppliers ship less, or stop doing special products for the company, and then because of that Toys “R” Us has a bad holiday season, that is going to ripple back to the supplier. Each business is truly part of a chain that is only as strong as its weakest link.

Our firm helps all sorts of companies make difficult decisions about what to do when a supplier or customer’s financial difficulties are impacting their own balance sheet. Because corporate workouts have been one of our specialties for so long, we have seen it all. There is rarely a business situation that we have not helped a client deal with before. This allows us to give our clients legal advice that is informed by the real world, instead of a solution that will work “in theory.”

We work with our business clients on both short term and long term solutions to their problems because we understand that business is cyclical. Problems need fixed today, but if you don’t address the underlying causes of the problem, you are going to be dealing with the same issues in a few months.

If you are looking for an attorney to help you deal with the ripple effects of a bankruptcy in your industry, we are ready to help.

Payless Emerges From Bankruptcy After Four And A Half Months

Business owners often ask us how long it will take to go through a restricting bankruptcy. In typically lawyerly fashion, we answer, “It depends.” No two bankruptcies are alike, and what happens in one case can only hint at what might happen in a similar situation. A look at the Payless bankruptcy provides a glimpse into a Chapter 11 bankruptcy that was rather quickly resolved and is therefore intriguing, particularly to those in the retail sector.

Retail Continues to Take a Beating

When Payless ShoeSource, the retail shoe store chain that revolutionized shoe shopping by championing self-service and low prices, announced in early April that it was filing for Chapter 11 bankruptcy, there were few people who thought it would complete the restructuring process very quickly. After all, American Apparel, Aeropostale, Rue 21, Gymboree, True Religion, Radio Shack, Eastern Outfitters, Gander Mountain and other companies have all struggled to restructure and close out their bankruptcy cases during the past year. Retail chains continue to struggle in the wake of the economic crisis and the emergence of e-commerce.

What Made Payless’s Bankruptcy Different?

It is difficult to say what made Payless’s bankruptcy run more smoothly than that of other retailers. What we do know is that they shook up their leadership, got rid of a bunch of debt, and updated their retail strategy.

In a statement announcing its restructuring and emergence from Chapter 11, the company said CEO Paul Jones will retire, and a search committee comprised of current board members and employees will look for new leadership.

The statement also revealed that the company eliminated over $435 million in funded debt through the Chapter 11 process. It was able to renegotiate leases and get its trade credit extended too.

According to Reuters, “Payless has closed roughly 700 mostly mall-based U.S. stores in bankruptcy… but is opening four mega stores here to add to some 3,200 post-bankruptcy locations in the U.S. and abroad. It plans to invest $234 million over five years, including on systems that will adjust inventory quickly in response to customer demand and improve its competitiveness on line…”

Is This Typical?

As Payless’s speedy bankruptcy illustrates, there really is no such thing as a typical bankruptcy.

Four and a half months is a really quick turn-around for a company the size of Payless, even if it wasn’t in the struggling retail sector. This timeline is more typical for smaller companies. However, the size of a company is not the only thing that can impact the length of time it takes a company to go through the Chapter 11 process.

Oftentimes the length of a bankruptcy will be determined by the availability of buyer or the viability of the business generally rather than any individual decisions the company makes or any action the court takes.

If you have questions about how long a bankruptcy will take, you should consult an experienced attorney rather than looking only at what has happened at another company.

Fewest Bankruptcies in a Decade

During the first half of 2017, 8,921 bankruptcies were filed in Wisconsin. This sounds like a lot, but it is actually the fewest filings during that period since 2007, when 7,642 cases were filed during that same period. This is a 1.5% drop from 2016, when 9,060 bankruptcies were filed January through June. We have been at recession levels for so long, this drop is a great sign for our state, and for the Milwaukee area, which leads the state in the number of bankruptcies per capita.

Why are we seeing fewer bankruptcies?

The Milwaukee Journal Sentinel speculated that we would be seeing even fewer bankruptcies if credit was harder to get and more people had health insurance because wages are up and the employment rate is down. That’s probably true, but there are other factors at play as well.

From what we are seeing, a lot of people have been holding off on filing for bankruptcy. Some people have simply not been able to afford the process, while others have waited to file because they expected things to get worse and wanted to start over on an upswing. It is encouraging that these sorts of people are filing now because it indicates that people and businesses are doing better, and expect to be doing better in the near future.

Once the pent-up demand for bankruptcy passes, we should be back to normal, pre-recession bankruptcy levels, which are dictated more by things like access to credit and medical debt.

How low can the bankruptcy rate go?

There are always going to be some number of bankruptcies filed, no matter how good the economy gets. In fact, experts worry when there are too few bankruptcies being filed even more than they worry there are too many. Too few bankruptcies indicate that the economy has slowed to a level that makes people afraid to take risks.

Not just a statistic.

Knowing that bankruptcies are a normal, expected part of the economy is obviously not too comforting when you are the one filing for bankruptcy. Our office tries to make the bankruptcy process as pain-free and quick as possible for our clients. To us, a bankruptcy is not just a statistic.  

Sometimes Bankruptcy Counsel Is A Hands On Job

When the bridal chain Alfred Angelo filed for bankruptcy and closed its stores earlier this year, it did so without much notice. Although the store managers were directed to send out all the orders they had on hand before shutting the doors for good, many did not. This left the company’s bankruptcy attorney with quite a mess on her hands. She got over 10,000 messages from panicked customers in just a few days, and she just couldn’t ignore them.

A recent Wall Street Journal article details her effort to get as many dresses and other items that have already been paid for, into the hands of the brides, bridesmaids, and other wedding guests who ordered them. This is a task she has undertaken more because she believes it is the right thing to do, than a legal responsibility.

While our firm’s lawyers have not yet had the opportunity to save the day for hundreds of brides, we wanted to share this story because it does a great job highlighting the fact that good bankruptcy attorneys are more than lawyers who know how to do math.

A good bankruptcy attorney is a problem solver. We know that business bankruptcies cause all kinds of issues for the creditors, suppliers, and customers doing business with a company that has filed. We try to minimize disruptions to the broader marketplace, while still keeping our client’s interest first.

A good bankruptcy attorney is proactive. When a potential client comes to us, we go over all of the options available to them. Sometimes we are able to help a business avoid bankruptcy by negotiating terms of forbearance or loan modifications with creditors.

A good bankruptcy attorney is willing to go the extra mile. Sometimes literally. While our offices are in downtown Milwaukee, we work with clients from all over Southeastern Wisconsin. We’ve put plenty of miles on our cars traveling the city streets, highways, and backroads of Milwaukee, Racine, Ozaukee, Waukesha, and Sheboygan Counties. We know that really understanding our client’s business and the situation it is in sometimes means we need to be on-site instead of in our offices.

If you are looking for a bankruptcy attorney that is will to go above and beyond to make sure things are done right in the moral sense as well as the legal sense, look no further. We make sure the i’s are dotted and the t’s are crossed and then some.

What Does the Average Consumer Bankruptcy Filer Look Like In Wisconsin?

The Administrative Office of the Courts has released its annual report on bankruptcy statistics. It provides a snapshot of the average bankruptcy filer in the United States, but it also breaks the data down by court, which allows us to get a glimpse of what the typical consumer bankruptcy filer here in Milwaukee looks like.

According to the report, in the United States as a whole, nearly 750,000 consumer bankruptcies were filed. Filers had assets of $72 billion and total liabilities of $191 billion.

Debtors in the Southern District of California and in the Northern District of California reported the highest average assets per petition at $344,000 and $224,000, respectively. Filers in the Western District of Tennessee reported the lowest average assets, $43,000.

Excluding districts with fewer than 200 case filings each, debtors in Western District of Washington reported the highest average liabilities per filed petition at $8,348,000. However, this data is skewed by one debtor in the district who reported total liabilities of $85,122,168,563. Filers in the Western District of Tennessee had the lowest average liabilities at $65,000.

The data from the Eastern District of Wisconsin gives you a good idea of what is going on with bankruptcies in the Milwaukee area since the majority of the bankruptcies in the entire district, which covers about half of the state, are from the 5 counties that make up the Milwaukee metropolitan area. 12,243 bankruptcies were filed in the Eastern District. Filers reported having over $737 million in assets and $1.1 billion in liabilities. This is an average of approximately $60,000 in assets and $90,000 in liabilities per filer.

Nationwide, approximately 61% of all consumer bankruptcy cases were filed under Chapter 7, which allows a debtor to liquidate their assets to pay off debts, then have most other debts forgiven. Around 38% of the cases were filed under Chapter 13, which requires the debtor to enter into a multi-year debt repayment plan that is supervised by the court. 52% of the people that filed under Chapter 13 were able to pay off all of their debts.

In the Eastern District of Wisconsin, 69% of the bankruptcy cases were filed under Chapter 7, while 34% of the cases were filed under Chapter 13. Almost 46% of the debtors who filed under Chapter 13 were able to pay off their debts.

The median average monthly income reported by all debtors was $2,668 (1 percent higher than in 2015), and the median average reported monthly expenses were $2,590 (less than 1 percent higher than in 2015). Filers in the Northern District of California had the highest median average monthly income with $3,500, and filers in Puerto Rico had the lowest median average monthly income with $1,848. Filers in the District of Connecticut had the highest median average expenses with $3,520, and filers in Western District of Tennessee had the lowest with $1,720.

In the Eastern District of Wisconsin, the median average monthly income reported by filers was $2,516. Median reported expenses were $2,478.

This all suggests that Milwaukee debtors are pretty average, which is a good thing! On average, people who live here are bringing in more money than they rack up in necessary expenses each month, and people here don’t have outrageous levels of debt. This means bankruptcy is an option that can help people in this area get back on their feet.

As American as Apple Pie

One of the best things about this country’s bankruptcy law is that it is inherently optimistic. It embodies a belief that people and businesses deserve a chance to start over without the shackles of debt holding them back, and it encourages financial risk taking by acting as a safety net. Viewed in the abstract, there is something about this that is just so quintessentially American. You might say bankruptcy is as American as apple pie.

What’s funny about saying bankruptcy is as American as apple pie is that neither apple pie nor bankruptcy were invented in the United States. Both were imported, perfected, and popularized here, however.

The roots of bankruptcy law go all the way back to Biblical times. In Chapter 15 of the book of Deuteronomy, it says:

“At the end of every seven years you must cancel debts. This is how it is to be done: Every creditor shall cancel any loan they have made to a fellow Israelite. They shall not require payment from anyone among their own people, because the Lord’s time for canceling debts has been proclaimed. You may require payment from a foreigner, but you must cancel any debt your fellow Israelite owes you.”

This sounds similar to today’s Chapter 7 bankruptcies, which forgive most debts. Even the period between debt cancelation years echoes the current requirement that filers wait a certain number of years before filing for bankruptcy again.   

Ancient Rome had laws that allowed creditors to seize the property of debtors who were unable or unwilling to pay, and allowed debtors to volunteer themselves as indentured servants to pay off debts. It is not too much of a stretch to see echoes of this system in our Chapter 13 bankruptcy law, which allows debtors to consolidate their debts and work on paying them off over a period of time.

In other parts of the world, and in different time periods, debtors’ prisons were common. Debtors were arrested and held in these facilities until they could pay off their debts. As you can imagine, this was counterproductive since someone who is in prison cannot earn a living that will allow them to pay off debts.  

What we think of as modern-day bankruptcy law was imported from England, like most of our laws were. Article 1, Section 8, Clause 4 of the U.S. Constitution authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” They did so almost immediately, and have continued to tinker with the law from time to time.

As the arch if history suggests, bankruptcy law is not frozen in time. It continues to undergo changes. Our bankruptcy laws have been amended over time to adapt to new circumstances and the changing economy. Today, the world looks to America as an example of what a successful, cutting-edge bankruptcy system should look like. When we change our law, other countries around the world often do so as well.