Thursday, February 9, 2012

OK Dokey BK

This week I joined an illustrious echelon. I am now in the same ranks as General Motors, Donald Trump’s companies and millions of Americans. I am bankrupt. This is not something that I’m particularly proud of, but I’m also not embarrassed by it. My favorite document, the U.S. Constitution authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States."

Going bankrupt is an oft-misunderstood process. For individuals there’s a misnomer that the process is akin to a law procedural on television. It’s not. It’s all about paperwork. There are reams of it to fill out before filing – listing all of one’s possessions and all of the debts owed. Copies of bills, bank statements, tax returns: anything that is listed need to be provided. Several times.

The 2005 revision to the code requires some education so that individuals learn from the experience and don’t have to repeat it. The first course is about a half-hour and pretty self-explanatory. After the initial filing but before the formal hearing a second course is required. The course is 5 to 6 hours --- and sections are timed to make sure that you don’t go too fast. It makes Driving School seem like a afternoon at the beach.

The Hearing is run by an appointee of the Trustee – a fancy way of describing a clerk. It’s held in a large auditorium style room – no witness boxes in sight. There’s 8 to 10 questions that get asked (out of maybe 15 total rotating questions). Some people get grilled further, others not. The average hearing took 90 seconds. Mine might have eeked closer to 2 minutes after I heard about 30 cases. In a few months when some more paperwork wends its way through the Federal bureaucracy it’ll be official.

According to the Bankruptcy Court in 2011 71% of all filings were fully liquidated, 28% reorganized individual’s debt and 1% were corporate restructurings. This statistic reinforces the fear that when a business goes bankrupt there’s a fear that it will disappear. The majority of the reorganizations, however, are of the large companies.

Take Tribune. It’s been in the court system for three years – one of the longest in history. (Dow Corning is the longest at 9 years.) The lawyers have pocketed $231 million so far.  Numerous plans have been rejected from one creditor group or another. Compare that to the GM bankruptcy – the fourth largest in U.S. history. It went through in 33 days thanks to some unorthodox rulings by the courts that stripped some creditors of their rights.

Nobody has a right to good credit – it’s earned. If you pay your bills reliably the reward is a high credit rating and low interest payments if you borrow money. My credit rating was 810 at one point…out of 850. Today it’s half – in the low 420’s. That’s the consequence of not paying bills – credit is taken away, if reinstated it will be at usurious rates because the risk will be perceived to be higher.

The U.S. Government’s credit rating was downgraded in August 2011. A whole range of reasons have been identified, many of which have merit. The bottom line, though, is that the debt that the U.S. carries now equals the total size of the annual U.S. economy – and by the end of this year the debt will exceed income. Imagine owing $110 but only earning $100 --- no matter if you turned over everything you earned you couldn’t pay the debt. As a result those who are owed the debt get concerned and raise the interest rate.

It’s ironic, then, that the largest bankruptcy in history is of a financial institution. Lehman Brothers bankruptcy in 2008 not only stands shoulders above WorldCom ($639B to $104B) but it also has the distinction of being the catalyst for the Financial meltdown of 2008.

When used properly the bankruptcy code allows individuals who have gotten into trouble an opportunity to be set on a new or revised path. Medical bills cause 60% of all bankruptcies according to CNN.  preventing foreclosure is the next significant reason, often from unemployment or changing circumstances. Last year (2011) 1.37 million people filed, an 11.9% drop from 2010 and an even larger drop from 2005 when 2 million people filed.

The core structure of the U.S. Government’s budget is broken. Our forefathers envisioned a need to allow people a structure to start over. Maybe it’s time for leaders from the Executive and Legislative branches to come together and restructure like so many businesses and individuals do when circumstances change. I know that won’t happen, especially in an election year. But if they don’t, they risk one of our creditors stepping in and forcing a restructuring. When that happens history will record it as the launch of World War III.

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