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Court rejects "sufficiently rooted" test and holds bankruptcy estate does not include portion of bonus earned from prepetition employment

In In re Brown, Case No. 18-81242 (Bankr. C.D. Ill. May 9, 2019), Judge Perkins of the Central District of Illinois, concluded that property of the estate did not include that portion of a debtor’s annual bonus payable after the petition date that was related to prepetition employment. In the Brown case, the debtor filed a chapter 7 case on August 17, 2018 and was due to receive a bonus from Caterpillar in 2019 pursuant to a Short Term Incentive Plan (the “STIP”). The STIP bonus was calculated based upon work performed during 2018. The trustee argued 62.7% of the STIP bonus was property of the estate because “62.7% of the bonus is rooted in the pre-bankruptcy past.” Id. In ruling against the trustee, Judge Perkins rejected the “sufficiently rooted” test (discussed below) and concluded the STIP bonus was not estate property because the debtor did not have a pre-petition property interest in the bonus as a matter of Illinois law. Citing the seminal Whiting Pools, 462 U.S. 198 (1983), Judge Perkins first pointed out that Section 541 does not expand the rights of the debtor and instead the trustee succeeds to no greater rights than those held by the debtor on the petition date. Judge Perkins then noted that “uncertainty may arise when a property interest has its origins in the prepetition time frame but isn’t obtainable by the debtor until after bankruptcy, subject to the postpetition occurrence of one or more contingencies.” After recognizing the distinction between the occurrence of a contingency and the existence of an expectancy, Judge Perkins analyzed whether the “sufficiently rooted” test — which gained currency from a Bankruptcy Act case known as Segal v. Rochelle, 382 U.S. 375 (1966) (addressing whether tax refund was property of bankruptcy estate) — survived enactment of Section 541. Under the “sufficiently rooted” test, bankruptcy courts routinely determined whether a property right was “sufficiently rooted” in prepetition events as to make it a prepetition property interest, even when payable post-petition. Classic examples of such property interests include tax refunds, sales commissions and, of course, employment bonuses. Under the “sufficiently rooted” test, the STIP bonus probably would have been property of the estate because 62.7% of the amount related to prepetition employment services. Noting, among other authorities, that the Fifth Circuit expressly held that “the sufficiently rooted” test did not survive the enactment of Section 541 (citing In re Burgess, 438 F.3d 493, 498-99 (5th Cir. 2006)), and that the Seventh Circuit has expressed skepticism about the usefulness of the “sufficiently rooted” test even in the context of tax refunds (citing In re Meyers, 616 F.3d 626 (7th Cir. 2010)), Judge Perkins reasoned that “[i]f applicable state law provides that a potential property interest of a debtor was merely an expectancy as of the petition date, the expectancy is properly excluded from the estate without regard to whether the interest may be said to be “rooted” in the debtor’s pre-bankruptcy past.” Judge Perkins then analyzed Illinois law to determine whether a bonus plan created a right, subject to a condition, or merely an expectancy; ultimately concluding that “where an employer reserves the absolute discretion not to award a future bonus, the bonus is treated under Illinois law as an expectancy, not a present property interest.” From that premise, Judge Perkins had little difficulty concluding that the contract language determining the debtor’s entitlement to a bonus from Caterpillar “makes the bonus discretionary and disclaims any obligation to pay” and thus creates “only a bare expectancy interest. [Accordingly], [t]he Trustee takes no present property interest in any future STIP payments and no part of it can become property of the estate.” In the penultimate part of his analysis, Judge Perkins concluded that “[t]o consider the bonus to be property of the estate simply because it related to [the debtor’s] prepetition employment would be to give the bankruptcy estate more than the Debtor had on the petition date [and thus] the Debtor’s expectancy interest in the 2018 STIP bonus is not a legal or equitable interest in property as of the commencement of the case under section 541(a)(1) and is not an asset of her estate subject to the Trustee’s administration.” Id. If you would like more information regarding bankruptcy filings and would like to speak to one of our experienced attorneys, please call (312) 878-6976 or fill out a contact form here. Read More
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The Small Business Reorganization Act

Last month, the Senate Judiciary Committee reintroduced the Small Business Reorganization Act (SB 1091). SB 1091 is intended to streamline the process for small businesses (those with debts less than $2,566,050) that wish to use Chapter 11 to reorganize. Key provisions of SB 1091 (the “SBRA”) include: Increasing the Debtors’ Ability to Negotiate a Successful Reorganization and Retain Control of the Business. Only the small business debtor may file a plan under subchapter V of the SBRA. The owner of the small business debtor may retain a stake in the company so long as the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests. If a trustee or a holder of an unsecured claim objects to the plan, the court cannot approve the plan unless the plan provides that all of the small business debtor’s projected disposable income to be received during the plan will be applied to make payments under the plan for a period of 3-5 years. Reducing Unnecessary Procedural Burdens and Costs. Unless the court for cause orders otherwise, an official committee of unsecured creditors will not be appointed and a disclosure statement will not be required. Increasing Oversight and Ensures Quick Reorganization. A standing trustee would be appointed in every small business debtor case to perform duties similar to those performed by a Chapter 12 or Chapter 13 trustee and help ensure the reorganization stays on track. The small business debtor must file a plan within 90 days of commencement, which may be extended under limited circumstances. An initial status conference would be required in every case within 60 days of commencement “to further the expeditious and economical resolution” of a SBRA case. If you would like to speak to one of our experienced attorneys regarding your business, please call (312) 878-6976 or fill out a contact form here. Read More
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Money inherited more than 180 days after petition date belongs to Chapter 13 bankruptcy estate

In Moore, the bankruptcy court for the Eastern District of Tennessee joined a majority of courts and held that money inherited outside of the 180 day window set forth in § 541 was still property of the chapter 13 estate. In the Moore case, the debtors filed for chapter 13 relief on November 15, 2016. The Debtor’s father passed away almost 18 months later and Mr. Moore received an inheritance of $14,76483 from his father’s estate. The Debtors then filed a motion to retain the inheritance so they could purchase a vehicle. The Chapter 13 Trustee objected, arguing the Debtors were seeking to retain non-exempt funds. The legal issue for the court was whether the inheritance was property of the bankruptcy estate in light of §541, which provides that an inheritance received up to 6 months after the petition date is property of the bankruptcy estate “The Debtors contended the inheritance I excluded from the estate because it would be excluded by § 541()(5)(A). “ Conversely, the trustee argued that in chapter 13 cases, property of the estate includes that which is brought in pursuant to §541, and also includes “all property of the kind specified in [§541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first[.] “ Noting that “There is a split in the authorities interpreting whether property inherited outside the 180-day period should be included in a chapter 13 estate,” the Moore court noted that “[t]he overwhelming majority of courts to have addressed this issue ‘agree that § 1306 modifies the § 541 time period in Chapter 13 cases” and concluded that post-petition inheritances received beyond 6 months after the petition date are also included in the bankruptcy estate. If you would like more information regarding bankruptcy filings and would like to speak to one of our experienced attorneys, please call (312) 878-6976 or fill out a contact form here. Read More
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Beware of Bankruptcy Petition Preparers

Every now and then, a debtor will appear in bankruptcy court on a case that is set to be dismissed. The nervous debtor will stand at the podium, and the judge will ask the debtor why he or she has not filed certain required papers within the time prescribed by the Bankruptcy Code. The debtor will likely appear flustered, “I don’t know, Judge.” The judge will ask some more questions, and the debtor will often reveal that he or she does not have an attorney, but rather has paid a non-attorney bankruptcy petition preparer (BPP) a non-trivial sum of money to help them file for bankruptcy. Unfortunately, in many of these cases, the judge will have no choice but to dismiss the debtor’s case because various statutory requirements have not been satisfied. The debtor will inevitably be very disappointed, as he or she will not receive a discharge of their debts or a refund of their filing fee. Needing to file for bankruptcy can be an overwhelming experience. Hiring a BPP instead of a bankruptcy lawyer in order to save money may seem like a good idea. While it is not illegal to hire a BPP, it is not always wise. Section 110 of the Bankruptcy Code explicitly allows for debtors to hire non-attorney BPPs to type their petition and schedules. 11 U.S.C. § 110. There are some very specific limitations and disclosure requirements for BPPs. 11 U.S.C. § 110(b)-(h). For example, BPPs “may not offer a potential debtor legal advice” 11 U.S.C. § 110(e)(2), they may not use the word “legal” or similar terms in their advertisements, 11 U.S.C. § 110(f), and they are required to fill out Official Form 119 every time they help prepare documents that are filed in a case. 11 U.S.C. § 110(b)(2). Some bankruptcy courts have imposed even stricter regulations for BPPs. For example, in the Eastern District of Michigan, a BPP may charge no more than $100 for their services. Bankr. E.D. Mich. Admin. Order 10-21. If a BPP does not comply with all the requirements of Section 110 of the Bankruptcy Code, he or she may face some very steep penalties. A debtor, trustee, or U.S. Trustee may file a motion against the BPP pursuant to Sections 110(i) or 110(l) of the Bankruptcy Code. The penalties awarded under this statute may include a refund of the fee the debtor paid to the BPP and the greater of $2,000 or twice the amount of the BPP’s fee. 11 U.S.C. § 110(i). Additionally, a BPP may be required to pay up to $1500 in fines to the U.S. Trustee for each violation of Section 110 of the Bankruptcy Code if certain conditions are met. 11 U.S.C. § 110(l). The court may also enjoin (or forbid) the offending BPP from providing their services to other debtors. 11 U.S.C. § 110(j). Some BPPs have even ended up in jail for providing “services” in violation of Section 110 (see links here, here and here). While it is good that debtors who have been ripped off by unscrupulous or incompetent BPPs have some recourse, the relief offered by Section 110 of the Bankruptcy Code does nothing to help these debtors get any closer to receiving a discharge of their debts. Overall, if you are considering filing for bankruptcy, please consider hiring an experienced bankruptcy attorney who be able to competently represent you. If you cannot afford an attorney, contact the clerk’s office at your local court to see if they can refer you to a legal aid clinic. In the Chicago area, the Bankruptcy Assistance Desk or a legal aid organization such as Chicago Volunteer Legal Services may be able to help you. If you have been a victim of a BPP, reach out to your local U.S. Trustee’s office for assistance. By cooperating with the U.S. Trustee, you may be able to recover your losses and you might be able to help prevent that BPP from harming another person like you. Read More
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Article from ABF Journal Explains how Courts have Treated Merchant Cash Advances (MCA)

In the November/December issue of the ABF Journal, attorney Jefferey Wurst explains the different types of MCAs and how Courts have ruled regarding the vehicle. According to Mr. Wurst, first there “are MCAs that advance money and get repaid solely from the collection of future receivables (assuming the risk of collection) and those that advance money and get repaid by taking daily or weekly ACH payments from the client’s bank account whether or not any receivables actually exist.” “Second are MCAs that rely on the performance of receivables found in factoring, which are generally based on true sales of the future receivables and without recourse.” Mr. Wurst goes on to explain that one of the key issues involves the characterization of the MCA as a loan or a purchase of a receivable. The answer to this question determines whether the MCA is subject to usury statutes (to the extent they exist). According to Mr. Wurst, under “New York law, the penalty for lenders making a usurious loan is not being deprived of any interest payments, as it is in many jurisdictions, but being deprived of receiving both interest and principal. In other words, the borrower gets a windfall by forgiveness of debt when it has borrowed money under usurious terms. Thus, it should not come as a surprise that when confronted with a lawsuit to recover on advances made to a merchant, that merchant attempts to claim the high cost of funds they are paying is usurious.” Mr. Wurst then explains that “[w]hether an MCA is a usurious loan first depends on whether the merchant sold the receivable or borrowed money with the receivable as collateral. Whether the sale of the receivable was a true sale under applicable law determines this.” The analysis regarding a true sale or a loan is complex and not suitable for a discussion here, but if you have any questions about how an MCA will be classified (i.e., true sale or loan), the attorneys at FactorLaw can assist. If would like to speak to one of our experienced attorneys, please call (312) 878-6976 or fill out a contact form here. Read More
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Are Health Savings Accounts Exempt from Creditor Claims in Illinois and Elsewhere?

Congress created Health Savings Accounts (HSAs) in 2003. 26 U.S.C. § 223. In the past fifteen years, Illinois courts have not issued any published decisions indicating whether funds held in a debtor’s HSA are exempted from a debtor’s bankruptcy estate or otherwise protected from creditors. As a result, it is unclear what will happen to the funds in a person’s HSA if that person files for bankruptcy in Illinois. An HSA is “a trust created or organized in the United States as a health savings account exclusively for the purpose of paying the qualified medical expenses of the account beneficiary . . . .” 26 U.S.C. § 223(d)(1). A person can only make contributions to an HSA if that person has a “high deductible health plan.” 26 U.S.C. § 223(c)(1)(A), which is a health plan that requires the beneficiary to pay a certain amount of expenses before coverage begins. 26 U.S.C. § 223(c)(2)(A). The beneficiary of an HSA “has liberal access to the funds – indeed, the beneficiary is entitled to distributions from the account for any purpose. However, the beneficiary will incur tax penalties unless the funds are used for ‘qualified medical expenses,’ which are essentially costs of health care ‘not compensated for by insurance or otherwise.’” Leitch v. Christians (In re Leitch), 494 B.R. 918, 920 (8th Cir. B.A.P. 2013) (citations omitted). When a person files for bankruptcy protection, all of their property becomes property of their bankruptcy estate pursuant to section 541(a) of the Bankruptcy Code, 11 U.S.C. § 541(a), subject to certain exceptions. Section 541(b) of the Bankruptcy Code lists types of property that are explicitly excluded from the bankruptcy estate. 11 U.S.C. § 541(b). Additionally, debtors may be able to claim certain property as exempt under state or federal law. Whether a HSA will be considered property of a debtor’s bankruptcy estate varies from state to state. The 8th Circuit Bankruptcy Appellate Panel found that HSAs are not excluded from a debtor’s estate pursuant to section 541(b)(7) of the Bankruptcy Code. Leitch, 494 B.R. at 921. Section 541(b)(7) provides that the bankruptcy estate does not include “any amount withheld by an employer from the wages of employees or payment as contributions . . . to a health insurance plan regulated by State law whether or not subject to such title[.]” 11 U.S.C. § 541(b)(7)(A)(ii). The court noted that HSAs were created two years before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) became law and reasoned that Congress would have excluded HSAs from property of the estate in BAPCPA if it had so desired. Leitch, 494 B.R. at 921. Moreover, the B.A.P. held that “since the funds in the HSA can be used by the beneficiary or any purpose . . . an HSA is not an insurance plan regulated by state law and, therefore, the HSA is not excluded from the bankruptcy estate by 11 U.S.C. § 541(b)(7)(A)(ii).” Id. The B.A.P. also held that HSAs are not covered by the federal exemptions listed in section 522(b)(1) of the Bankruptcy Code. Id. at 921-22. Many states do not allow debtors to use the exemptions listed in section 522 of the Bankruptcy Code, and instead only allow debtors to use state law exemptions. Therefore, whether an HSA will be exempted from a debtor’s bankruptcy estate is often a function of state law. At least ten states have statutes that explicitly protect HSAs from creditors and exempt them from debtors’ bankruptcy estates: Florida, Indiana, Minnesota, Mississippi, Montana, Oregon, Tennessee, Texas, Virginia, and Washington. Fla. Stat. Ann. § 222.22(2), Ind. Code Ann. § 34-55-10-2(c)(8), Minn. Stat. 550.37(26), Miss. Code. Ann. § 85-3-1(g), Montana Code Ann. § 25-13-608(1)(l), Or. Rev. Stat. § 18.345(o), Tenn. Code Ann. § 26-2-105(b), Tex. Prop. Code Ann. § 42.0021(a), Va. Code Ann. § 38.2-5604(B), and Wash. Rev. Code § 6.15.020(4). The exemption statutes in each of these states, except Mississippi, specifically reference the federal statute that created HSAs, 26 U.S.C. § 223. Courts have held that HSAs are not exempt from a debtor’s bankruptcy estate in several states, including Georgia, Ohio, Idaho, and Colorado, that do not explicitly include HSAs in their exemption statues. See In re Mooney, 503 B.R. 916 (Bankr. M.D. Ga. 2014); In re Lombardy, No. 11-1737, 2012 Bankr. LEXIS 827, at *12-14 (Bankr. N.D. Ohio Feb. 9, 2012), In re Stanger, 385 B.R. 758, 763-65 (Bankr. D. Idaho 2008), and In re Gardner, No. 12-12485, 2013 Bankr. LEXIS 2921 (Bankr. D. Colo. July 19, 2013). Courts in these states have declined to create a new exemption for HSAs. For example, in In re Mooney, the bankruptcy court found “nothing in [the Georgia exemption statute] expressly exempts HSAs. The Georgia Assembly has amended the exemption statute three times since the development of HSAs; none of the amendments included any director or indirect references to HSAs.” 503 B.R. 916, 919 (Bankr… Read More
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The Absolute Priority rule is alive and well for Chapter 11 cases

I. Explanation of absolute priority rule Consumer debtors that do not qualify for protection under Chapter 7 or Chapter 13 of the Bankruptcy Code, are left with filing under Chapter 11, where they will come face-to-face with the absolute priority rule (the “APR”). The APR is a cornerstone of bankruptcy law. It was first developed by the Supreme Court in the late nineteenth-century to deal with widespread collusion in railroad reorganizations. To prevent unfair deals between senior creditors and equity holders, the Court held that “stockholders are not entitled to any share of the capital stock nor to any dividend of the profits until all the debts of the corporation are paid.”[1] Simply stated, the APR establishes a hierarchy of rights in bankruptcy proceedings, commencing with secured creditors at the top of the heap and ending with equity holders (or the debtor when the case involves an individual) at the bottom. This rule recognizes that equity holders, or debtors, have less rights and entitlement to recovery of a bankrupt enterprise’s assets because they stood to reap the most if the entity succeeded. It also recognizes that equity-holders generally control the allocation of value and absent limitations, they would unfairly allocate a disproportionate share to themselves. “This rule assured those who did business with the corporation that if the business were dissolved the creditors would be paid before the insiders would recover their investments. In case of collapse, the creditors could count on payment in full before equity collected anything from the business assets.”[2] Individuals debtors may find problematic their efforts to satisfy the APR because a Chapter 11 plan cannot be confirmed over the objection of a dissenting class of creditors if value is being allocated to the debtor, unless secured creditors and unsecured creditors are paid in full (see below discussion on the requirements for full payment), or the Plan meets the stringent “new value” test.[3] On a practical level, an individual debtor cannot retain any property in a Chapter 11,[4] unless all senior creditors are paid in full, including over an extended time period; all impaired classes accept the plan; or the debtor contributes what is known as “new value” in exchange for retaining its equity interests. [5] II. How the rule applies in chapter 11 The APR evolved beyond a judicially created doctrine when Congress codified it as part of the Bankruptcy Code in 1978.[6] To confirm a Chapter 11 plan, all impaired classes must accept the plan.[7] However, a court may still confirm the plan (i.e., through a “cramdown”) if an impaired class rejects it, but only if the plan is otherwise “fair and equitable” within the meaning of the Bankruptcy Code, or, in some cases, the debtor contributes “new value” in accordance with that exception to the APR, and satisfies certain other criteria enumerated in §§1129(a)(1) through (a)(14).[8] To be fair and equitable, a plan must provide property of a value, as of the effective date of the plan, equal to the allowed amount of a creditor’s claim or it must satisfy the APR. A plan can satisfy the APR if value is allocated in accordance with the APR – e.g., if unsecured creditors are not paid in full, the debtor receives no property. Full payment to senior classes does not necessarily require a single payment of the full amount owed and does not have to be immediate or in accordance with existing debt instruments (except for loans on an individual’s principal residence, which cannot be modified), so long as the payment stream is accompanied with an appropriate interest rate and is otherwise “fair and equitable.” Thus, the deferred cash payments can be structured in many ways, so long as the restructured terms are “fair and equitable” in the view of the Court. This makes the cramdown of a Chapter 11 plan difficult for individual debtors that have a lot of debt and limited means to repay that debt.[9] III. After BAPCPA a minority of lower courts have held that the APR no longer applies in individual chapter 11 cases. In 1988, the Supreme Court unanimously held the APR applied in individual Chapter 11 cases.[10] However, the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) that was enacted in 2005, led some courts to question whether the APR was still applicable in individual Chapter 11 cases.[11] BAPCPA modified §1129(b)(2)(B)(ii) and added §1115. The interaction between these two provisions has generated some decisions holding that the APR no longer applies when the debtor is an individual, although the majority view, which is followed by five Circuit Courts, holds otherwise – i.e., the APR still applies and was not abrogated by BAPCPA. Section 1129(b)(2)(B)(ii) provides that, “in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of sub… Read More
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Discharge of debts in Chapters 7 and 13; important differences you should know

Through a Chapter 13 payment plan, a debtor may discharge multiple types of debt that cannot be discharged in a Chapter 7 bankruptcy (a liquidation). Thus, if you qualify for a Chapter 13 bankruptcy, and your debts would be nondischargeable in a Chapter 7, Chapter 13 may be a better option. The most common debts that can be discharged in Chapter 13 bankruptcy, but not in a Chapter 7 bankruptcy include: Debts arising out of willful and maliciously property damage: If a court finds you willfully or maliciously damaged another person’s property, the resulting debt cannot be discharged in a Chapter 7 bankruptcy. But you can discharge debts related to willful and malicious property damage in Chapter 13 bankruptcy. Willful or malicious acts that cause personal injury or death cannot be discharged in either a Chapter 7 or Chapter 13 bankruptcy.Tax Obligations: If you incur a debt to pay off nondischargeable tax obligations (such as paying your tax liability with a credit card), you can discharge that debt in Chapter 13 bankruptcy, but not in Chapter 7.Certain debts incurred in divorce or separation proceedings: Domestic support obligations, such as alimony or child support, cannot be discharged in either a Chapter 7 or a Chapter 13 case. However, other types of debts to your spouse, former spouse, or child through a divorce decree, property settlement, separation agreement, or other related proceeding, can be discharged in a Chapter 13 bankruptcy. Such dischargeable obligations typically include debts assigned to you in the course of divorce or separation proceedings (e.g., obligation to pay off a joint credit card debt).Certain fines and penalties owed to the government: Other than criminal fines, fines and penalties payable to the government are generally dischargeable in a Chapter 13 bankruptcy. In contrast, a Chapter 7 bankruptcy will not discharge most government fines and penalties.Debts denied discharge in a prior bankruptcy: If you filed for bankruptcy previously and the court denied your discharge, you can’t eliminate those same debts in a subsequent Chapter 7 bankruptcy. However, you may be able to discharge those in Chapter 13. Loans against your retirement account: A loan against your retirement account can be dischargeable in Chapter 13 bankruptcy, but not in Chapter 7 bankruptcy. There are, however, reasons to keep repaying such loans in a Chapter 13 bankruptcy. The amount you are required to pay under Chapter 13 plan depends upon the amount of your disposable income. Repaying a loan against your retirement funds reduces the amount of your disposable income, so it often makes sense to keep repaying that loan because the payments benefit you while reducing the amount you are required to pay other creditors. The above are just some of the factors to consider when deciding whether a Chapter 13 bankruptcy makes sense for you. Feel free to contact our office for a free consultation to further discuss whether a Chapter 13 bankruptcy is right for you. Read More
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Bankruptcy Filings among Elderly Increased Exponentially over Last 25 Years

According to an article posted today in the New York Times by Tara Segal Bernard, “[f]or a rapidly growing share of older Americans, traditional ideas about life in retirement are being upended by a dismal reality: bankruptcy.” According to Ms. Bernard, “[t]he signs of potential trouble — vanishing pensions, soaring medical expenses, inadequate savings — have been building for years.” A large part of her conclusions are drawn from a recently published study by the Consumer Bankruptcy Project, which found that the “rate of people 65 and older filing for bankruptcy is three times what it was in 1991, the study found, and the same group accounts for a far greater share of all filers.” Ms. Bernard further reports that: Driving the surge, the study suggests, is a three-decade shift of financial risk from government and employers to individuals, who are bearing an ever-greater responsibility for their own financial well-being as the social safety net shrinks. The transfer has come in the form of, among other things, longer waits for full Social Security benefits, the replacement of employer-provided pensions with 401(k) savings plans and more out-of-pocket spending on health care. Declining incomes, whether in retirement or leading up to it, compound the challenge. As the study, from the Consumer Bankruptcy Project, explains, older people whose finances are precarious have few places to turn. “When the costs of aging are off-loaded onto a population that simply does not have access to adequate resources, something has to give,” the study says, “and older Americans turn to what little is left of the social safety net — bankruptcy court.” “The forces at work affect many Americans, but older people are often less able to weather them, according to Professor Thorne and her colleagues in the study. Finding, and keeping, one job is hard enough for an older person. Taking on another to pay unexpected bills is almost unfathomable. Bankruptcy can offer a fresh start for people who need one, but for older Americans it ‘is too little too late,’ the study says. ‘By the time they file, their wealth has vanished and they simply do not have enough years to get back on their feet.’” Ms. Barnard also cites statistics from the Federal Reserve’s survey of consumer finances, via the Consumer Bankruptcy Project, showing that filings by people in the 55 to 64 age group increased by 66% from 1991 to 2016 and filings by people in the 65 to 74 age grou increased by 204% over the same period. According to Ms. Bernard: The data gathered by the researchers is stark. From February 2013 to November 2016, there were 3.6 bankruptcy filers per 1,000 people 65 to 74; in 1991, there were 1.2. Not only are more older people seeking relief through bankruptcy, but they also represent a widening slice of all filers: 12.2 percent of filers are now 65 or older, up from 2.1 percent in 1991. The jump is so pronounced, the study says, that the aging of the baby boom generation cannot explain it. If you would like more information regarding bankruptcy filings and would like to speak to one of our experienced attorneys, please call (312) 878-6976 or fill out a contact form here. Read More
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Experts predicting increased ilIiquidity and link it to the climate that led to the 2008 crisis

According to a recent report by Morgan Stanley “market liquidity across assets is in decline” and “low liquidity were the fundamental triggers of the 2008 crisis.” Those bankruptcy practitioners that had first hand experience of the 2008-2010 turmoil, will recall the frustration of not being able to help clients workout of a distressed situation because of the lack of liquidity (e.g., alternatives). Often bankruptcy was the only alternative and even that option was less than optimal because the market for additional capital or options was broken. Liquidation was often the only option. One example cited by Morgan Stanley relates to corporate bonds. According to their report: “Dealer holdings of corporate bonds have shrunk from 3% of the market to just 0.3% today. While this means that dealers themselves have less to liquidate, their capacity to move risk to a new buyer may be limited and require larger repricing of the asset class in times of stress.” The repricing is likely to mean reduced value for corporate bonds and may result in other strategies for offloading such positions. One such strategy might be vulture buying of this asset class and potentially an “own to loan” strategy or a liquidation strategy for certain asset classes. Morgan Stanley cites another example related to public debt. According to Morgan Stanley, in the recent past, central banks built large positions in bonds. “As central banks built these positions, liquidity in the affected assets was excellent. It’s hard to imagine anything better for liquidity than the presence of a steady, deep, well-telegraphed bid. But these forces are now swinging in the other direction. The Fed’s purchases have already begun to reverse, the ECB’s are likely to over the next six months, and with close to half of its bond market already owned by the BoJ, it will eventually face a constraint.” Given that the U.S. economy is in the late stages of an extended recovery that is close to a record-setting duration, and given the near certainty that the economy operates like a pendulum, the open question is not “if” but “when” will the U.S. economy stumble, how bad will it get and what will it mean for bankruptcy and other workout professionals. If you would like more information regarding bankruptcy filings and would like to speak to one of our experienced attorneys, please call (312) 878-6976 or fill out a contact form here. Read More
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