Thursday, March 29, 2012

Extending Deadlines and Section 108 of the Bankruptcy Code

How many times in life have we wished that we could extend a deadline? Section 108 of the Bankruptcy Code, under certain circumstances, allows us to do just that.

Section 108(a) extends any statute of limitation to commence an action that the debtor could have taken before the filing of the bankruptcy petition for two years after the date of the bankruptcy filing, unless it would expire later under applicable non-bankruptcy law. 

Section 108(b) is applicable when there is a time limit set for taking certain actions, such as the filing of pleadings or claims, and that period has not expired before the date a bankruptcy petition was filed.  Under § 108(b), a bankruptcy trustee is given 60 days to take actions not covered under § 108(a), such as filing a pleading, a demand notice, or proof of claim or loss (such as an insurance claim).  Section 108(b) also extends the time to commence an administrative proceeding or file a notice of appeal.

Section 108(b) does not apply to time periods in actions against a debtor.  Such actions are stayed by § 362 of the Bankruptcy Code and may proceed only when the stay under the applicable sections of the Bankruptcy Code terminates.  Therefore, in a Chapter 11 bankruptcy case, deadlines that have not expired prior to the bankruptcy filing may be extended for an additional 60 day period. 

In Canney v. Merchants Bank (In re Canney), 284 F.3d 362 (2002), the Second Circuit (which includes New York) held that when there is a foreclosure sale and the debtor has a certain amount of time by law to redeem the property, the debtor’s rights to the property are controlled by § 108(b), and extend the redemption period for a maximum of 60 days.

Section 108(c) provides that if a non-bankruptcy claim against the debtor is stayed due to bankruptcy, any deadline for commencing or continuing the action is extended to 30 days after notice of the termination of the stay, if the deadline would have occurred on an earlier date (if a party does not receive notice of the termination of the stay, the 30 days never begins to run).
For more information about how bankruptcy affects deadlines in legal actions, please contact Jim Shenwick.

Friday, March 23, 2012

WSJ: Student-Loan Debt Tops $1 Trillion

The amount Americans owe on student loans is far higher than earlier estimates and could lead some consumers to postpone buying homes, potentially slowing the housing recovery, U.S. officials said Wednesday.

Total student debt outstanding appears to have surpassed $1 trillion late last year, said officials at the Consumer Financial Protection Bureau, a federal agency created in the wake of the financial crisis. That would be roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York.

The new figure—released Wednesday at a banking conference in Austin, Texas—is a preliminary finding from a study of student debt that the bureau plans to release this summer. Bureau officials said the estimate is based on a survey of private lenders, as opposed to other estimates that rely on a sampling of consumer credit reports.

CFPB officials say student debt is rising for several reasons, including a surge in Americans going to college in recent years to escape the weak labor market. Also, tuition increases—which many colleges say are needed to offset big cuts in state funding—have many students taking out bigger loans.

In addition, the interest costs on older loans are climbing as borrowers fall behind on payments, reflecting mounting financial strains, bureau officials said. New York Fed data show that as many as one in four student borrowers who have begun repaying their education debts are behind on payments.

Economists say college is an increasingly good investment because of the widening pay gap between jobs that require a degree and those that don't. Ultimately, the educational degrees and added skills are meant to help workers earn higher incomes that, in time, will more than offset the student debt.

But as more people go to college and assume bigger loans for education, they may take longer than previous generations to hit key milestones such as buying a house or getting married, U.S. officials and economists say. It could take longer for heavily indebted graduates to save money for a down payment on a home, or it could be harder for them to qualify for mortgages.

Rohit Chopra, student-loan ombudsman for the Consumer Financial Protection Bureau, said student debt could ultimately slow the recovery of the housing market. "First-time home-buyers are a substantial part of the housing market," Mr. Chopra said in a speech at the banking conference in Austin. "Instead of saving for a down payment, these borrowers are sending big payments every month."

Student debt is a burden not just for recent college graduates in their 20s but also parents, who often co-sign their children's student loans, as well as midcareer professionals who opted to go back to school during the sluggish recovery.

David Johnson, a 58-year-old groundskeeper from Milton, Wash., decided to leave gardening after more than two decades to become a nurse. Two years ago, he took out about $18,000 in private and federal loans to attend a local community college that had a nursing program. After completing prerequisite classes, he learned that the program had a waiting list. With no guarantee of getting into the nursing program, he is wondering whether to take out more debt to continue in school.

"It's an awkward place to be. I'm not yet a nurse but I've got all this debt and interest compounding on me," he said. "I don't have a lot of working years left and I'm saddled with this debt."
Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved.

Thursday, March 22, 2012

NYT: One Couple's Ordeal Against Credit-Card and Housing Debt

TWELVE-STEP programs often talk about the moment of clarity, when an addict starts to understand just how dire the situation has become.

For Karawynn Long, 42, and Jak Koke, 47, it arrived in 2005, when they crossed the $40,000 mark on their credit card bills. “For some reason that was a scary number, over some internal threshold,” Ms. Long said.

Their pledge to fix the problem came a couple of years before the economy turned, giving them a head start on all the other people who buckled down once disaster become clear. Ms. Long and Mr. Koke, who live here, paid off the debt, earned more money and changed their spending habits — all of the things you’re supposed to do when plotting a financial turnaround.

But in the end, their best efforts were not enough to avoid being dragged down by the one asset that they thought would protect them — their home, which they will have to shed before they can complete their comeback.

Their story begins in early 2002, when they moved in together. A year later, they began a publishing start-up — Per Aspera Press — that they hoped would become their own science fiction and fantasy imprint. The business name is taken from the Latin phrase “ad astra per aspera,” which means “to the stars through difficulties.” But the effort generated more difficulties than stars, and they struggled to finance it with ever-more credit card debt.

Ms. Long, an author herself, also acknowledged that half of that $40,000-plus debt load was from living beyond their means.

She always assumed she would share the upper-middle-class lifestyle of her childhood. She went out to eat — a lot — something that continued during her relationship with Mr. Koke. They took vacations. And when money was tight? “Basically I just put it on credit cards to keep that level of lifestyle no matter the actual situation,” she said. “Like I was entitled to that.”

Mr. Koke grew up in what he describes as an average middle-class family. Both his parents worked. His money philosophy has always been to try to arrange his expenses and his life so that he could live on part-time employment, with the rest of his time devoted to writing novels.
“I did pick up the responsibility gene in the sense that up until we had our business where we ran up this huge debt, I didn’t have much debt on my cards,” he said. And the pair were sure the publishing imprint would succeed. “It always seemed like at some point it will break through and pay for itself and our lives, too,” Mr. Koke said. “But it never actually did.”

The credit cards had also seen them through periods of unemployment. Both have spent the bulk of their careers in the technology industry, mostly as contract employees. She has worked as a Web designer at various start-ups, and he has had jobs as a biotech researcher at several universities, as well as on-and-off work doing technical and marketing writing and editing at Microsoft.
He has two daughters from a previous marriage: Michaela, 19, who rents a room from a great-aunt in Portland, Ore., while saving for college, and Claire, 13, who lives half-time with her father and Ms. Long.

By late 2005, Ms. Long started to worry about the ballooning debt. Early in 2006 they began household austerity measures, including few or no meals in restaurants, no vacations and the suspension of contributions to their retirement funds.
The couple also shut down the publishing effort and found full-time jobs. She worked for a brokerage firm, and he got what he thought was a long-term contract writing for Microsoft. That raised their combined annual income to around $150,000.

Then, they threw every extra penny at the credit card debt, around $2,000 a month. Soon the older daughter, Michaela, noticed that the formerly automatic answer of “Sure, honey, here’s the money” started to change. “If you wanted to get a sports sweatshirt or something we would work something out where I paid half if I really wanted it,” Michaela said.
Claire, who was 7 at the time, said she noted the drop-off in vacations and meals out. And Christmas changed. “I did think I used to want to have lots of stuff under the tree,” she said. “But then I kind of got more excited about people opening the presents that I got them and making them happy. You don’t need to have all the things.”

The couple first took aim at the credit cards with the highest interest rates and wiped out the entire balance within two years. To celebrate, they took vacations to Sea World and Mexico. But the family had mere months to enjoy the accomplishment before the nation spiraled into financial crisis.

By October 2008, Ms. Long was unemployed. Mr. Koke’s hours at Microsoft were slashed in half, and his wages for the time he did work dropped by 10 percent. Both have lived off contract work in the three years since, and their annual income is less than half of its peak. What saved them from utter financial devastation was the fact that they had rid themselves of the credit card debt.

But then there was that one remaining troubled debt lurking: their home. The green, single-story house sits among fragrant pine trees in a quiet neighborhood of north Seattle, near Haller Lake. Inside, the furnishings are sparse and tend toward Native American arts and Pacific Northwest décor.
They bought it in 2006, just as their family austerity measures began. It measures 1,800 square feet and cost just over $400,000. They had not saved enough for a down payment, so they did what many Americans did at the time: they took out a second mortgage, also known as a piggyback loan. The first mortgage was a 30-year fixed rate loan for $303,750. The second mortgage was for $101,250 with a 15-year fixed rate and a balloon payment at the end. This meant they had no equity in the home from the outset. Based on estimates at, they now owe $82,000 more on the mortgage than the property is worth.

Given their severely diminished household income, the two mortgage payments ended up being about 65 percent of the couple’s take-home pay each month. “We were killing ourselves to pay this mortgage,” Ms. Long said.

So in January 2011, they stopped paying.

They said they had tried to work with their bank, to no avail. So they are squatting in their own home, waiting for a foreclosure notice to tell them when they must leave. Ms. Long, who now writes her own personal finance blog called Pocketmint, was blunt. “I’m C.F.O. of this household,” she said. “It’s a business decision for us.”

The mortgage payments that have not gone to the bank have instead gone into an emergency fund and will also help with an eventual apartment rental.
The family also took a vacation last fall, their first in at least two years. The four of them flew to Washington, D.C., for less than $250 each, according to Ms. Long, who did dogged airfare research. They stayed with a relative, prepared most of their own meals (including lunches to eat outside the Smithsonian museums), and spent less than $1,800 for nine days, she said.

Those who would look askance at that expense when they are not paying the mortgage, Ms. Long said it was money well spent. “We took a vacation to the Smithsonian because we’ve learned that experiences, rather than possessions, are the way to happiness,” she said. “And we wanted to share that with our kids.”

Claire says she learned even more over the last few years by watching her parents work their way through their financial problems. “I learned,” she said, “a lot about not getting trapped.”

Devin Maverick Robins contributed reporting.

Copyright 2012 The New York Times Company.  All rights reserved.

Monday, March 05, 2012

NYT: Bankruptcy Becomes Unaffordable for Small Businesses

For the past 23 years, Chuck Benjamin has been working as a turnaround consultant, primarily for troubled private companies with annual revenues of $25 million to $250 million. During that time, his company — Benjamin Capital Advisors of Rye Brook, N.Y., and Boca Raton, Fla. — has handled some 70 cases. “My endgame is to save companies,” said Mr. Benjamin, 71, “hopefully for their owners.” 

That has become much more difficult in recent years, he says, as changes in bankruptcy law have given unsecured creditors more power and made bankruptcy more expensive. These legal changes and increased costs have in turn pushed troubled companies to liquidate their assets instead of reorganizing, Mr. Benjamin said, which ends up eliminating the original owners — and many jobs — in the process. The following is a condensed version of a recent conversation.
Q. You say the bankruptcy process is broken. How so?
A. When bankruptcy evolved, it was to protect debtors, the owners. The whole concept was forgiving debts or restructuring so the business would survive in the hands of the owners. But the rules have changed over the years. Today, if they have to go into Chapter 11, the odds of the owners keeping the business are much lower. So there’s no incentive for the owners to enter Chapter 11 and reorganize. Why save a company for somebody else?
Q. What changed?
A. First, the Supreme Court’s 1999 LaSalle decision basically meant that any company that entered bankruptcy was on the market and could be bought either whole or piecemeal. And then in 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, and that changed the face of Chapter 11 for privately held businesses. No. 1, B.A.P.C.P.A. changed the landlord’s position. It limits the time to just seven months for debtors to decide whether to accept or reject the lease in bankruptcy. It used to be you could get extended almost forever the time you could accept or reject a lease. Now they have seven months. That’s not a long time to decide which locations to close while you’re in trouble and you’re trying to work through all kinds of other issues.
The second change is exclusivity, that is, the debtor’s exclusive right to file a plan of reorganization. It used to be you had all kinds of extensions. Sometimes bankruptcies used to take two, three, four, five years. I had one that was in Chapter 11 for seven years. But it survived. Now you have 18 months where the owner has the exclusive right to file plans for reorganization. Unsecured creditors know that after 18 months they can file a plan excluding the debtor. After you’re in Chapter 11 for eight or 10 months, creditors say, “I’m just going to hang on. I’ll file my own plan and take over the company. Or after 18 months we’ll just liquidate it.”
Q. It’s hard to see anything positive about a bankruptcy that takes seven years.
A. Sometimes staying in bankruptcy a longer time was better, because it gave a debtor time to catch its breath.
Q. Who wins from this change?
A. The LaSalle decision and B.A.P.C.P.A. have given unsecured creditors a huge advantage, and the result is the cost of bankruptcy has gotten so high — because of professional and other costs — that the ability to continue the company under current ownership has reached almost zero. I understand the plight of unsecured creditors, but everyone who sells on unsecured account understands the risk. Every businessman understands this when he sells and makes a credit decision.
Q. Really? Small-business owners offer credit like this routinely. You don’t think they expect to get paid?
A. You know that old saying, “Let the buyer beware”? I think it’s every businessman’s responsibility to know to whom he sells and offers credit. If I sell to you and you begin to pay very slowly — which often happens before a bankruptcy — I should stop selling to you on credit. But if I continue to sell to you to make a buck, it’s not your fault, it’s mine.
Q. So what happens instead of reorganization these days?
A. Companies are liquidated. Back in 1983, the Lionel case allowed companies the freedom to sell off assets as opposed to filing a plan of reorganization. It expanded what could be sold in a “363 sale.” The 363 component was originally designed to allow companies to sell off spoilable product, like fruit. If you were in the grocery business and you filed bankruptcy, it allowed you to sell off assets. The Lionel case expanded that so you could sell major assets, virtually including the whole company. That’s a quick way to avoid a plan of reorganization.
Q. How does a 363 sale work?
A. The 363 sale requires nothing more than saying, “I’m going to sell you my equipment,” and I publish that, and for 30 or 40 days people have a right to object to it and the judge can decide, O.K., sell it, or if there’s a higher or better bid, it goes to the highest or best bidder. That happened in the Brunschwig & Fils bankruptcy where I was the chief restructuring officer. I sold the company’s assets for $10 million, very successful, but the original owners lost control and 116 employees lost their jobs. In the old days we would have been able to reorganize the company.
Q. How do these changes affect a troubled company’s ability to get financing during reorganization?
A. All of these changes say to the world that the chance of a company surviving bankruptcy is much lower. And if it’s much lower, the banks aren’t going to give debtor-in-possession financing — and rightfully so. The D.I.P. financer gets a priority lien. Last in, first out. But the company has to survive to have the money to pay that super-priority lien.
Q. Does this change how troubled companies act?
A. Debtors are delaying seeking help longer and longer and longer. They’re very frustrated. They’re walking in molasses. They figure if they wait another week the economy is going to turn.
Q. What should business owners do instead of filing for Chapter 11?
A. People need to seek help quicker, change their business plan quicker, and avoid Chapter 11. It’s just an absolute last resort. It’s virtually nonsurvivable. One of the things we do as consultants is take two weak companies that are facing annihilation and we merge them and we get one survivable company — without a bankruptcy. We also try to make out-of-court settlements with creditors, as opposed to Chapter 11 proceedings. In Chapter 11, the debtor pays for attorneys, accountants and consultants of the creditors’ committee. They even pay for the investment bankers. The owner is paying the other side to oppose him. It’s tilted to the unsecured creditor side.
Q. But doesn’t this law fix some biases toward debtors that allowed them to drag out the process, hurting their creditors as they did so?
A. The law probably does fix some problems, but you have to look at the nuances. There are some cases with the tighter rules where the creditors get a little more but the company fails. The other option is the bankruptcy lingers and the creditors get a little less but the company survives, and that way the creditors continue to have a customer.
Q. You’re a small-business owner yourself. How is your business doing?
A. Business right now is kind of quiet. I think this is the calm before the storm. 

Copyright 2012 The New York Times Company.  All rights reserved.