Bankruptcy is not just for individuals and businesses. In certain states, municipalities can file for bankruptcy as well. Recently, the city of Detroit filed for bankruptcy, becoming the largest municipal bankruptcy in terms of both population size and debt load.
On July 18, 2013, Detroit filed for bankruptcy. Detroit has approximately $18.5 billion dollars in debt. While the population of Detroit is large (approximately 700,000 people live there), Detroit has lost over half its population from its peak in 1950. Further, it seems that the city is decaying. There are almost 78,000 abandoned buildings in Detroit, and Detroit's murder rate is at the highest it has been in a long time.
While bankruptcy may be the best answer for Detroit to solve its financial problems, it will not be an easy bankruptcy. Experts believe that the case may last up to three years and that the cost could be in the hundreds of millions of dollars.
Further, there are those who object to Detroit's bankruptcy filing. In fact, just a day after the bankruptcy filing, a state court judge held that the bankruptcy filing violated the state constitution. While this ruling is unlikely to derail the bankruptcy case, it shows that Detroit has a long road ahead of it.
Sources: Nick Carey, Reuters, " Detroit files for bankruptcy, stage set for court fight," July 18, 2013; Susanna Kim, ABC News, " Judge Says Detroit Bankruptcy Unconstitutional," July 19, 2013
Many individuals dream of owning their own business. They want the freedom to be their own boss and the ability to grow and expand at whatever rate works for them. But when there is a change in the economy, many businesses may face financial hardship. This may be so serious as to require the owner to file for business bankruptcy.
The San Jose based home improvement chain, Orchard Supply Hardware, filed for Chapter 11 bankruptcy protection recently. The filing includes a deal that may sell 60 of its 91 stores to Lowe's.
If the deal goes through, Lowe's may continue to operate the stores as a separate business while keeping the Orchard name. The agreement hinges on Lowe's winning the bankruptcy auction.
Orchard was founded in 1931. During the recession, annual sales dropped by more than 20 percent. Sales have begun to turn around but representatives from Orchard say that they remain burdened debt acquired during their spin-off from Sears in 2011.
Orchard stores average about a third of the size of Lowe's. Experts say that even if many of the stores aren't bought by Lowe's, the opening of that size real estate will be great for the market. There are many retailers that are in the market for property of that size.
Filing for Chapter 11 bankruptcy can put a stop to all creditor's actions including mechanics' liens and repossession. Bankruptcy allows a business to create a debt reorganization plan. This can allow reduced interest payments and reduced or eliminated penalties and fees.
Source: The Sacramento Bee, "Orchard Supply Hardware files Chapter11; Lowe's may buy at least 60 stores," Dale Kasler, Jun. 19, 2013
Running a business can be both a rewarding and difficult experience. When the economy changes, it can substantially affect a business owner's ability to run their business. Sometimes, the only way for the owner to get their company out of a tough situation is to file for business bankruptcy.
On Tuesday, a bankruptcy judge allowed American Airlines to pay a severance package to its chairman and CEO. This ruling sets the stage for American to exit Chapter 11 bankruptcy and merge with US Airways. The decision still requires the approval of American's creditors.
American filed for Chapter 11 bankruptcy 18 months ago. They also tried to negotiate with their employee unions to lower operating costs. US Airways and American announced a merger at the end of last year.
The issue holding up the merger was the severance package for the executives. The Bankruptcy Code prevents any severance package given to a CEO to be more than ten times the amount given to the average employee. Generally creditors must approve any reorganization or merger plans.
There are two types of business bankruptcy. One liquidates the business to pay off creditors. The other creates a debt reorganization and repayment plan. Both can help a business get out of a tough financial situation and can provide the business a fresh financial start, like in the case of American Airlines.
One of the major benefits of filing for bankruptcy is that all creditors actions are stopped immediately. This includes liens and repossession. A debt reorganization plan will generally decrease interest payments and penalties or fees are reduced or eliminated.
No matter the situation, if a business is considering filing for bankruptcy, they should consider their options to determine whether it is a viable option. In addition, they might qualify for various form of bankruptcy, so it is a good idea to seek out advice to understand what their best option is.
Source: The Sacramento Bee, "Bankruptcy judge removes obstacle to American-US Airways merger," Curtis Tate, June 4, 2013
It doesn't take much of a change in the economy for a business to be affected. Once an owner falls behind with one creditor, it doesn't take much more to fall behind with most of them. This can leave a business in serious debt that the owner may or may not be able to get out from under. One available option to get out from the debt is to file for Chapter 11 bankruptcy.
Bankruptcy can give a business owner a means to reduce or even eliminate some debt. It also stops all creditor actions against the company, such as repossessions and mechanics liens.
YBT International, an online marketing company, filed for Chapter 11 recently in Illinois. The company listed their assets at $1.31 million and their debts at $7.18 million. The current business plan is to use the bankruptcy to reorganize and start again.
YBT currently is in agreement with a lender for the lender to provide a line of credit to the company to help pay off the debts.
YBT is an internet-based company that began by selling travel service websites to outside agents. In 2009, the company settled a lawsuit with the California attorney general over deceptive marketing.
In 2011, the company sold its headquarters and surrounding property when it faced a fall in revenue. Substantial management changes and canceled mergers have left YBT in its current economic situation.
Chapter 11 bankruptcy works with the creditors and vendors of the company that filed to create a solution to the mounting debt. Bankruptcy will allow the company to create a debt reorganization plan under the supervision of the court. Bankruptcy will reduce interest payments, and the penalties and fees may be reduced or even eliminated.
Source: St. Louis Business Journal, "YBT International files for Chapter 11 bankruptcy," Diana Barr, Mar. 5, 2013
Californians know that running a business can be a difficult but fulfilling profession. Entrepreneurship is what this country is built on. But with the rising costs of labor and material coupled with the slow economy, many businesses are struggling. It does not take long for a struggling business owner to quickly get behind on payments to creditors. One missed payment can quickly snowball into substantial debt. With substantial debt, business owners may turn to filing a for a business bankruptcy to solve their debt problems.
Many companies are able to emerge from bankruptcy without previously accumulated debt. This was the case for the Kansas plane maker Beechcraft. This company filed for bankruptcy protection in May. The bankruptcy also allowed the company to dump its unprofitable arm, the business jet operations. The company is now focusing on smaller planes and its military work.
The company is emerging from bankruptcy only two weeks after the bankruptcy courts approved their reorganization plan. They were able to cut their debt and get about $600 million in exit financing from their creditors. About 90 percent of the company is now owned by investment firms. The company has more than 5,400 employees at this time and is hoping that number will hold steady. A potential government contract for military planes may bring in an additional 700 jobs.
Bankruptcy puts an automatic stay on creditor collection actions. This includes repossession and mechanics liens.
The most common type of business bankruptcy if Chapter 11. Chapter 11 bankruptcy allows the business owner to create a debt reorganization plan. This allows for a reduction of interest rates and a reduction or elimination of penalties and fees associated with the debts.
Source: Sacramento Bee, "Beechcraft emerges from bankruptcy protection," Roxana Hegeman, Feb. 19, 2013
The most recent economic downturn has taken its toll on businesses. Many businesses have been forced to turn to business bankruptcy to survive or move on from a failing business. Business bankruptcy is known as Chapter 11 bankruptcy. Filing for bankruptcy stops all creditors actions immediately, which includes mechanics liens.
A power wholesaler and its Chicago subsidiary filed for Chapter 11 protection on Dec. 12. The company, Edison Mission Energy, and its subsidiary Midwest Generation have close to $5 billion in debt. The company is based in Santa Ana but filed for bankruptcy in Chicago.
The companies have no plans of laying anyone off. Edision Mission cited low power prices, high fuel costs and environmental regulations as the reasons for its increasing debt.
Edison Mission Energy is owned by Edison International. The Edison Mission president says that he hopes that the company is able to pull out of the bankruptcy as a separate company from Edison International. The power company has close to 1,000 employees and owns over 40 power plants in California, Pennsylvania, Iowa and Illinois.
Chapter 11 bankruptcy allows a company to work with creditors and vendors to create a reorganization plan. In many cases, interest payments will be reduced and penalties and fees may be reduced or even eliminated.
It does not take much of an economic downturn to significantly affect a business. Only a minor change in revenue can cause an owner to juggle payments to creditors. Vendors will begin to cut off supplies, and creditors will begin to harass the owner for their debts. Bankruptcy can provide the needed debt relief for a business to continue operation or at least pay off creditors.
Source: Sacramento Bee, "Power wholesaler files for bankruptcy in Illinois," Dec. 17, 2012