When I think of bankruptcy I generally think of people declaring it. This could be for any number of reasons, such as large medical bills, poor financial decisions, losing work and being unable to find more, etc. With the recession, bankruptcy filings have increased with some very interesting cases popping up in the news. Because of this, I’ve learned that entities, individuals, or organizations can declare bankruptcy.
Bankruptcy allows a company or individual to be protected under the law while debts are cancelled and/or repaid.
Chapter 7 Bankruptcy. The most commonly used chapter of bankruptcy is a Chapter 7 bankruptcy. Under this type, individuals’ assets are collected and sold for cash with the proceeds going towards creditors—think liquidation.
Chapter 13 Bankruptcy. Chapter 13 bankruptcies are for individuals that have a steady source of income (but can also be used by small businesses). In this plan the entity or person must settle all of its debts within 3-5 years with a plan that they develop. Foreclosures and/or collection actions are temporarily halted and the debtor gets to keep their property. Plans are based on the debtor’s ability to pay, not based on the amount owed. Large corporations (and some individuals) can use a Chapter 11 bankruptcy in order to keep their business open. Under this chapter, all collection activities must cease while the organization goes through the complex and expensive process of reorganizing.
Chapter 12 Bankruptcy. Family farmers and family fishermen can file a Chapter 12 bankruptcy should they need to. The requirement is that they have steady annual income (though seasonal income is fine as well). This is a cheaper option than filing a Chapter 11.
Chapter 9 Bankruptcy. There is also a Chapter 9 bankruptcy available to municipalities only and involves reorganization, not liquidation.
It’s also important to note that cancelled debt is considered taxable income by the IRS: Tax Return Bankruptcy Debt.
Below are some particularly interesting and weird cases of bankruptcy by organizations that you don’t typically see declaring bankruptcy. Each of these bankruptcies occurred in small or large part due to the downturn in the economy.
- Dodgers (Chapter 11): In June of 2011 a judge approved a $150 million bankruptcy financing agreement. Baseball Commissioner Bud Selig accused the Dodgers owner Frank McCourt of “siphoning off more than $100 million in club revenue and driving the Dodgers into a liquidity crisis.” He is also accused of using this money to live a lavish lifestyle, and driving away game attendance due to fans’ dislike of him (attendance was already down due to the recession). The Dodgers have accused Commissioner Bud Selig of not approving a multibillion-dollar TV deal which would have helped the cash-strapped team.
- Vallejo City Council (Chapter 9): This city of 117,000 residents was faced with a $16 million deficit in June of 2008 for the coming fiscal year (July), and voted to declare bankruptcy. This was brought about mainly due to a substantial decrease in property tax, sales tax, and transfer fee collection due to the slumping housing market. City employee salaries account for 80% of spending, and they could not get the employees to concede to any decrease in pay and/or benefits.
- Temple Hills Christian School (Chapter 11): The church that runs this school, the Progressive Baptist Church, owed $2.86 million on its mortgage and at least an additional $1.88 million in overdue state and federal taxes when they filed in 2009. The property includes a church, a school building, a gymnasium and a four-bedroom house.
- Archdiocese of Milwaukee (Chapter 11): In January 2011 the archdiocese of Milwaukee declared bankruptcy amid multiple lawsuits from molestation victims. On a website created to explain the bankruptcy, the archdiocese explained that there had been $12 million in settlement costs. In order to help pay these settlement costs, the archdiocese has sold off some property, mortgaged properties, liquidated savings, liquidated investments, and eliminated some programs and services. Specifically in November of 2010 there was a court decision made that insurance companies were not responsible towards the payment of any of these financial settlements.
- Sun-Times Media Group (Chapter 11): This company operates 59 newspapers, including the Chicago Sun-Times. Jeremy L. Halbreich, Chairman and Interim Chief Executive Officer of Sun-Times Media Group said that the bankruptcy is a result of the decrease in newspaper subscriptions, the economic downturn, and a significant, pending IRS tax liability dating back to previous management. These newspapers are still in operation.
Do any of these surprise you? Which bankruptcies have caught your attention in the last few years?