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.

D-D-D-Defense

If you are a true Packers fan, you know that January 23, 2011 was one of the most exciting days in recent memory for the Packers’ defensive line. The Packers were playing Bears in the NFC Championship Game at Soldier Field. By the time the 4th quarter rolled around we were winning, but it was an ugly game. Then, seemingly out of nowhere, Packers defensive tackle B.J. Raji intercepted a pass and returned it for a touchdown. The 338-pound Raji then broke into a very memorable hula dance, and the Packers went on to win that game, and the Super Bowl.  

Preference defense is not as exciting as the Packers defense, but it can be just as critical to your success as the Packers defensive line is to the team’s success.

A preference defense is necessary when a preference action is filed against your business. Preference actions are the technical legal name for the notice you get when a customer files for bankruptcy. They exist because the court has the power to claw back any funds paid to you by someone who has filed for bankruptcy if the payment was made within 90 days of the bankruptcy. Policymakers gave courts this power because they don’t want people who are planning on filing bankruptcy to pay off their favorite creditors and leave others in a lurch. This is where the term preference action comes from.

Policymakers also wanted to make sure that debtors couldn’t transfer assets to a creditor just to keep them out of the bankruptcy estate. They wanted to make it easy for the courts to claw back assets if they thought anything other than business as usual was going on.

Although preference actions were created to protect against shady behavior, most preference actions are filed against a business that was just going about its business as usual, not suspecting that its customer was in financial distress. No wrongdoing is necessary on the part of the creditor for a preference action to be filed against them.

Fortunately, there are several defensive tactics that creditors can rely on if served with notice of a preferential action. For example, if the payment or transfer of other assets to you was made at the time of the sale or transfer of something of value to the debtor, and that is how you typically did business, and how you intended this transaction to go, you may be able to use a contemporaneous exchange defense. This defense is common, and is why a lot of contracts specify that they are cash-on-delivery (COD).

Most preference actions settle, so it is a good idea to talk with an experienced bankruptcy attorney about what your options are if you are served with one. It is understandably frustrating to pay someone to protect money that is rightfully yours, but it is better to pay a little than to pay it all back to a court. Just like with the Packers, a little defense can help you take your deals to the end zone.

Credit Counseling Is Not Just Another Hoop To Jump Through

There is a Revolutionary War era fort in Morristown, New Jersey known as Fort Nonsense. Legend has it that Washington has his men construct the fort in order to keep them busy and out of trouble during a winter encampment in the town.

The idea that Washington needed to keep his men thinking about the war and out of trouble makes a good story, but scholars say it is probably not true. Forts like the one Washington ordered built were a common form of defense, and he typically had more things on his to-do list than he had soldiers to do them, so soldiers were not just loafing around during the winter months.

There are a lot of things about the bankruptcy process that are Fort Nonsense-like. Numerous aspects of the process seem like they are only there to make filing more difficult and time-consuming than it needs to be. However, each step of the process exists for a particular reason.

Credit Counseling Is Not Nonsense

Take credit counseling for example. Debtors that want to file for personal bankruptcy under Chapter 7 or Chapter 13 must first seek credit counseling with a court-approved provider. This may seem like just another hoop that a would-be filer must jump through, but everyone who takes the credit counseling requirement seriously learns a few things that can help them manage their finances better in the long term. This is true even in cases where the debtor has been forced into bankruptcy by something like surprise medical bills.

The counselors typically work with a debtor to put together a budget, and discuss strategies for sticking to it. Counselors also make sure the debtor understands how to avoid financial risks and the importance of having a good credit score.  

Depending on the type of program, the credit counselor might also help the debtor consolidate debt, negotiate a better deal on existing debt, or set up a repayment plan.

Some debtors who were previously planning on filing for bankruptcy find that they no longer need to do so after they have worked with a credit counselor.

Finding A Counselor

As mentioned above, the courts have a list of approved credit counseling providers. Debtors who want to file for personal bankruptcy under Chapter 7 or Chapter 11 must get counseling from someone on the court’s list.

Here in the Eastern District of Wisconsin, there are counselors that will meet with you face to face, or you can work with a counselor over the phone or online.

Even though it is mandatory, counseling is not free. The credit counseling providers can charge a reasonable fee for their service. However, if a debtor absolutely cannot afford to pay, the counselors are supposed to work for free, or at a reduced rate.

At the end of the counseling course, the debtor will get a certificate of completion. This certificate must be filed with the court or the bankruptcy judge will throw the case out.

When Chapter 11 Just Isn’t Working Out As Planned

Coming to terms with the fact that a business is failing is extremely difficult for many business owners. A business almost becomes an extension of oneself after so much heart and soul have been poured into it. And business owners tend to be overly optimistic, otherwise they never would have started a business in the first place.

Many business owners facing bankruptcy want to file under Chapter 11, which allows them to retool, and move forward rather than wind down their affairs. But Chapter 11 is not the best option for all businesses. Many times a business simply cannot be salvaged, no matter how much the business owner wishes it could be. In such a situation, it may be necessary to convert a Chapter 11 bankruptcy into a Chapter 7 bankruptcy.

A Recent Example Of A Chapter 11 to Chapter 7 Conversion

There have been several sporting goods retailers with stores in the Milwaukee area file for bankruptcy over the past couple years. MC Sports, which is based in Michigan but had 7 stores in Wisconsin, filed for Chapter 11 bankruptcy in February 2017. It began liquidating its inventory to pay back creditors while looking for a buyer that could bring the business back from the brink. In late May, the company asked the court to convert its bankruptcy from Chapter 11 to Chapter 7 after it was unable to find a buyer and had decided to close its doors permanently.  

Conversion is Common

This is not an unusual situation. Many businesses that file under Chapter 11 and continue to struggle, even after taking advantage of the benefits that the bankruptcy law provides, end up converting to Chapter 7 and winding the business down completely. Reorganization is simply not possible for every business out there.

Debtors who filed under Chapter 11 typically have a one-time absolute right to convert the case from a Chapter 11 case to a Chapter 7 case.

Sometimes Business Owners Have No Choice But To Convert

Sometimes debtors have no choice but to have their case converted to a Chapter 7 bankruptcy. A party in interest, which includes creditors, can file a motion asking the court to convert a Chapter 11 case “for cause.”

There are many ways a party in interest can show cause. They can show the business is being mismanaged, present evidence that the business is continuing to lose money and is unlikely to recover, or alert the courts that the public is being put at risk by the continued operation of the business in question. These are just a few of the most common ways a party in interest can show cause. The Bankruptcy Code sets forth numerous examples of cause that would support conversion.

Don’t Guess Or Go It Alone, Contact An Experienced Bankruptcy Attorney

Business owners who are struggling to make Chapter 11 work, and creditors or other parties in interest who are frustrated with a case they are involved with, should not hesitate to speak with an attorney about converting a Chapter 11 case into a Chapter 7 case. There are few downsides to converting, but an experienced bankruptcy attorney can explain the pros and cons of converting a specific case.