Subscribe Payment

Category: Blog

The “Credit Crisis” Still Exists

July 2, 2009

It’s gotten pretty quiet out there about whether businesses can get loans; what was known as the “credit crisis.”  It hasn’t loosened up very much. Maybe there is money to lend.  Maybe there isn’t.  Even if there is, it seems that only those busineses with good credit, good assets and a good business plan will qualify.  These are the best risks.

But there is still another credit crisis out there.  That is the crisis that small- and medium-sized businesses are facing daily.  The question of whether to extend credit to its customers is a daily issue.  Can we afford to use up our limited credit line on extending credit to new customers?  What if we need it for materials or staff?  Or advertising?  Are there was to reduce our risks to enable us to get the business without losing our shirts?  These are questions that are asked more and more frequently as this recession continues.

Credit managers and other treasury people need to worry about these issues and make decisions based on proper policy, proper risk analysis and proper documentation (when they do lend).

Business owners and managers:  make sure you are thinking about this stuff other than when the need is immediate.

Bob Bernstein

“They Know they Owe the Money” – Overcoming the Burden of Proof and the Importance of Supporting Documentation

June 29, 2009

When a collection claim results in litigation, a creditor must become familiar with certain legal concepts that will often determine whether or not the creditor sees any recovery as a result of the lawsuit.  One such legal concept is the “burden of proof.” 

 

In all civil litigation, the burden of proof requires the plaintiff, the creditor, to convince the trier of fact (either a judge or jury) of the plaintiff’s entitlement to the relief being sought.  The plaintiff must prove each element of its claim, or cause of action, in order to recover.  In other words, the initial burden of proof is on the plaintiff to show the court why the defendant/debtor owes the money. 

 

The underlying legal cause of action in a collection case is typically for breach of contract.  Generally, a plaintiff must show: 1) the existence of a contract and its essential terms; 2) a breach of a duty imposed by the contract; and 3) resultant damages.  This is why it is critical that a creditor keep meticulous and detailed business records, which can be used to meet the plaintiff’s initial burden of proof.  

 

Invoices between the parties can be offered as evidence of the existence of a contract between the parties.  The breach is the defendant/debtor’s failure to pay according to invoice terms.  Lastly, the plaintiff/creditor has been damaged because they have provided goods to the defendant/debtor and have not received payment.  Seems simply enough, but one would be surprised at the number of creditors who do not have or simply do not feel they should be burdened with having to produce such supporting documentation for the court. 

 

Keep in mind that when your attorney asks you to provide documentation of the claim against the debtor, he or she is not questioning the merits of your claim, but rather preparing to meet the burden that the law has placed on you as a plaintiff in a civil action.  Also, if you haven’t realized it by now, simply stating that the debtor knows they owe the money will not suffice.    

Chrysler Filing Raising Eyebrows Among Seasoned Practitioners

June 18, 2009

The Bankruptcy Code mandates that secured creditors be paid the full value of the collateral securing their claim. Only after secured creditors are paid IN FULL is unsecured creditors to be paid anything. In thousands of cases every year, debtors and creditors are bound by the “priority scheme” set forth in the bankruptcy code. Often, a debtor’s inability to pay its secured creditors is the primary reason the debtor is unable to reorganize under chapter 11 of the Bankruptcy Code.

 

For this reason, Chrysler filing bankruptcy  is raising a lot of eyebrows amongst seasoned bankruptcy practitioners and judges. A federal appeals court in New York had earlier approved the sale of Chrysler’s assets to Fiat. A group of Indiana pension and construction retirement funds, which hold less than 1 percent of Chrysler’s secured debt, claimed the sale unfairly favors Chrysler’s unsecured stakeholders such as the union ahead of secured debt holders like themselves.

Chrysler, Fiat and the Obama administration warned that the Supreme Court’s intervention could ruin the sale, stressing that Chrysler was losing $100 million every day its plants remain closed and that the deal would automatically terminate in less than a week, with no guarantee that a new agreement would be reached. If the closing was delayed by more than 10 days, the government will need to “either to increase its overall funding to the detriment of taxpayers, or abandon its role in the transaction,” the administration said.

Without a doubt, the stakes were high but the result – complete abandonment of 50 years of bankruptcy laws – was surprising. The Supreme Court turned down the Indiana funds’ request to block the sale, essentially deciding that the issue was not serious enough to warrant hearing a full appeal.

The general thinking is that the Obama Administration is the driving force behind these developments. Before the bankruptcy, the Administration consistently referred to any automaker bankruptcy as a “structured” bankruptcy. As anyone practicing in bankruptcy can tell you, “mega” bankruptcies such as Chrysler or GM are never structured and more often resemble a three-ringed circus. Having seen the Chrysler case play out, it is clear that the executive branch has had a controlling hand in the bankruptcy case.

 

Allowing the executive branch of the government to unilaterally ignore the well-established rules of the Bankruptcy Code because the debtor in the case is “too big to fail” sets a dangerous precedent. It is not hard to imagine future bankruptcy counsel arguing that future debtors are also “too big to fail.” If Judges follow the Chrysler decision, the result is that the system as we know it will not apply to large bankruptcy cases and that “new rules” will be constructed to help failing companies.

 

Most dedicated bankruptcy lawyers and judges maintain a stout devotion to the “integrity of the system,” a phrase often used to imply that the rules of the Bankruptcy Code must be followed no matter what the circumstance. I have always believed that the integrity of the bankruptcy system was unwavering and that all debtors – large or small, personal or corporate – were bound by the same rules. The Chrysler case calls that belief into question.

 

Don’t Make it Personal

June 5, 2009

“They stole from me!” “I am not taking a penny less than the full amount owed!” “I want to nail that son of a b#@^$!”  Often creditors engage an attorney to recover an amount owed from a debtor, and the creditor feels betrayed or wronged by the debtor.  It doesn’t matter whether the account debtor is a long time customer who has ignored demands for payment or a one time credit sale; these feelings of animosity toward that individual or entity are still present.  If not checked, these feelings can boil over and lead to unproductive or unnecessary litigation that only ends up costing the creditor more time and money.

As with any service industry, one of the first duties of a creditors’ rights or bankruptcy attorney is to monitor, deal with and ultimately manage client expectations and emotions.  I would suggest that the first thing that needs to be done is to get your client in an “economical mindset.”  A creditor needs to realize that when a debtor files bankruptcy or the creditor is forced to place an account with a law firm for collection, then the account is already a loss.  For a creditor’s rights attorney the goal then becomes finding the best way to mitigate that loss and obtain the most favorable resolution for their client.

Therefore, every decision during the “recovery” process should be analyzed while taking full account of the economical consequences of that decision.  No where is that more prevalent then when deciding whether or not to initiate litigation.  Immediately filing a lawsuit without a preliminary asset search or investigation into the financial stability of your debtor can turn out to be the most counterproductive thing a creditor can do when trying to be made whole.  Likewise continuing to pursue litigation when it is obvious that there is no financial recovery to be had can only hurt a creditor’s bottom line.

Sounds simple enough.  Why do creditors continue to fall into these same pitfalls?  Emotion.  Creditors become too focused on “punishing” the debtor, and lose focus of the end goal.  Money.

Luckily, the problems outlined above are easy to remedy.  Creditors, heed your attorney’s advice and try to avoid focusing on the emotions involved in the dispute at hand.  Attorneys, take control of the situation and make it clear to your client that pursuing certain avenues, while emotionally satisfying, will simply lead to the loss of more time and money.

I understand that sometimes a message needs to be sent, but for those creditors who seek truth and justice in a failed creditor/debtor relationship, I would suggest visiting a house of worship.  It will be less expensive and they may have better luck.

Bankruptcy Issues for Creditors

May 26, 2009

In 2005, a record number of debtors filed bankruptcy prior to the effective date of the amendments to avoid the amendments to the bankruptcy code that made it more difficult for debtors to file bankruptcy. After the amendments took effect, the number of bankruptcies being filed nosedived. Many people attributed the lower number of filings to the new amendments. Those “in the know” realized that the shortage in bankrutpcy filings was a result of the high number of bankruptcies filed just before the amendments took effect. We all believed that the new amendments, while more budensome for debtors, would not significantly lower the number of bankruptcy filings in the long term.

Not surprisingly, according to the United States Trustee’s office, bankruptcies are once again on the rise at near record levels. See http://www.uscourts.gov/statistics-reports/caseload-statistics-data-tables. Of course, with the economy in a deep recession, this news is not unexpected. With the rise in bankruptcies, here are a few things to keep in mind as a creditor:

First, debtors are finding themselves overextended with credit cards, lines of credit and other unsecured loans. If a debtor comes to you asking for credit, it is extremely important in these times to do your homework to make sure that the debtor is able to repay any credit you extend. That means more than just asking for paystubs or bank account information. Often, Debtors with high income levels have high expenses. It’s important to check both before extending credit.

Second, now more than ever, cash up front is a creditor’s best friend. If you don’t extend credit, or only extend minimum credit amounts, you’re less likely to get burned by a debtor filing bankruptcy. Right now, it may be better to turn down a sale than to sell product that ultimately is never paid for.

Finally, preference actions are on the rise. In the past few months, our office has seen a significant increase in the number of preference actions being filed against creditors. As a creditor, its important to know that you may have valid expenses that can reduce or even eliminate your preference exposure. If you find yourself on the wrong end of a preference action, experienced bankruptcy counsel might be able to help.

Bob Bernstein’s Get P.A.I.D. book has a lot of helpful tips for managing your business in a struggling economy. The economy is something that we all have to deal with and it appears that only the strong will survive. Have a plan, be prepared, and you too can survive these trying times.

 

Chapter 11 – What the Public Needs to Know to Understand the Chrysler Bankruptcy

May 12, 2009

by Robert S. Bernstein, Esq.

Since the late 1970s, the public really started to learn about Chapter 11 and how it works in “big companies.”  Through the 80s and 90s with the airlines and the steel companies, it became more “routine” for big companies to file Chapter 11 bankruptcy.  Today, of course, we are hearing about the Chrysler Chapter 11 and the likely GM Chapter 11.  Whether the cases are quick (as promised) or longer (as likely), it would be good to revisit the basics of Chapter 11 so we can all better understand what is happening.

In light of the newsworthy filing by Chrysler and the probable filing by GM, having a basic understanding of Chapter helps explain some of the maneuvering.

It is Bankruptcy.  The Bankruptcy Code is a federal statute (Title 11, United States Code – the “Code”).  Chapter 11 is the business reorganization chapter of the Code.  Chapter 7 is the straight liquidation chapter.  Chapter 13 is the wage-earner reorganization chapter.

Who is who?  The company that files (Chrysler) is the Debtor.  If the Debtor is still in control of its business (as in most Chapter 11 cases), it is called a Debtor-in-Possession or DIP.  The people who are owed money are called creditors.  The people (or companies) who own the debtor (stockholders or otherwise) are called interest holders.  The Judge is the Judge or the Court.  Everyone has a lawyer (or several).  In large and complex cases, the Court often appoints an Examiner (to investigate) or a Trustee (to examine and control).  If a Trustee is appointed, he or she takes control of the assets and the business.  The Debtor is then out of possession and is no longer a DIP.

Chapter 11 allows Court-supervised restructuring.  The Code permits the changing of contracts over the objection of the other parties.  Debts are contracts, supplier agreements are contracts, and dealer agreements are contracts, to name a few.  The Court supervises the process.  The parties (all of the stakeholders) all get to have their say and the Court tries to balance the interests under the Code.

Debts.  Debt comes in different flavors.  Senior (or secured) debt has the right to take specific assets if not paid.  This is similar to a home’s mortgage loan.  If property filed and perfected, the debt is secured.  Priority unsecured debt is that debt which has no right to specific property, but has been given priority under the Code.  Consumer deposits, wages, and some employee benefits are examples of things that get paid before other, regular, unsecured debt.  Non-priority unsecured debt would be things like amounts owed to suppliers for deliveries prior to the bankruptcy.  Since nothing is that simple, there are some supplier deliveries that are given priority under some circumstances.  Debts with no special treatment are referred to as general unsecured debts.

Administrative Debts.  The costs of running the Chapter 11 and the Company are usually entitled to a very high priority in a distribution.  These include expenses incurred in the ordinary course of business, as well as the professional fees of representatives of “official parties” in the case.  These include the lawyers, financial advisors, and investment bankers for the Debtor, any official committees, and any Trustee or Examiner.

Contracts.  If a contract has already been performed by one side or the other, the other party is just entitled to money and is a creditor.  If there is still something to be performed by both sides, then the contract is “executory.”  Unfulfilled orders and unexpired real estate leases are examples of executory contracts.  If the contract is an executory contract, then the Debtor often gets to decide if it wants to keep the contract or not.  This is known as “assuming” or “rejecting” a contract.  Generally, the Debtor gets to make this choice, subject to Court approval.  If the debtor’s decision unreasonably burdens the company (harming other creditors), the Court may not approve the decision.

Assuming or Rejecting a Contract.  If the debtor decides to assume the executory contract, it is usually required to cure any defaults and show that it can perform in the future.  The debtor then gets the benefits and burdens of that contract after the bankruptcy.  If the Debtor chooses to reject a contract, the other party may be entitled to damages, just as if the company had breached a contract outside of bankruptcy.  The damages are usually treated as pre-bankruptcy, unsecured debts and are added to the other debts of the Debtor.  Collective Bargaining Agreements (Union contracts) have additional protections, but can eventually be modified or rejected by the Debtor.

Sales of Assets.  Although unclear in the current stories about Chrysler, we are expecting a sale of some of the operating assets of the Debtor.  Section 363 of the Code allows the sale of assets free of liens of the secured creditors.  These sales are often referred to as a “363 Sale.”

Plan of Reorganization.  This is the Debtor’s proposed restructuring.  Everyone (and in this case that includes the government) gets to weigh in on the Plan and try to improve its respective position.  This is the document that says who gets what and what the company looks like when it comes out the other end of the bankruptcy.  Sometimes the Plan is negotiated before the bankruptcy case is filed and then the Plan is filed at or near the time when the bankruptcy petition is filed, along with the required approvals of creditors.  When that works, the case can be called a Pre-Pack or pre-packaged bankruptcy.  When it doesn’t work, the Court still considers the proposal of the creditors and decides if it meets the tests of the Code and can be approved.

Why couldn’t this be done outside of bankruptcy?  Outside of bankruptcy, all parties must agree to the change of contracts and debts.  In bankruptcy, the Court can bind reluctant arties under certain circumstances.  It is often hard to get unanimous consent in a class of creditors (like bondholders or trade vendors).  Chapter 11 allows the Court to force a treatment on a class when more than half the creditors voting and more than  2/3 of the amount of money voting, approves the treatment.  Sometimes the Court can approve a plan when even these tests aren’t met, but it requires a much more difficult burden n the Plan proponent.

Why is Chapter 11 so expensive?  Some say Enron will cost more than $1 billion in professional fees.  Lehman Brothers estimates run over $700 million.  The Debtor’s professional have to handle everything and fight with everyone.  Every official party (committee, Examiner, Trustee) has professionals that get paid by the Debtor and have to participate in every aspect of the case to make sure their constituency is represented.  So every time the Judge hears anything in the case, there are several (or dozens) of lawyers in the court getting paid by the Debtor. 

Why does it take so long?  They can be very complicated.  A company like Chrysler didn’t get created overnight and didn’t get into this mess overnight.  It can take month or years to figure out how to fix it or to unwind it if it can’t fixed.  The Code has reasonable time limits built in, but things can get messy.  If everyone agrees in a Pre-Pack, it can move through in 60 days or so.  Some large cases have.  Here, it is likely to take much longer.  Who knows?

What to expect?  Expect stories about how Chrysler can jettison dealer agreements (which it can), pay some suppliers and not others (which it can), close plants and end supplier relationships (which it can).  If there is a good restructuring plan which just needed the power of the Court to bind reluctant creditors, it might move pretty smoothly.  With Lenders being asked to write off billions of dollars, expect there to be some significant relocation.

This outline of the basic terms and concepts should help people to better follow the twists and turns.

Shouldn’t Judicial Campaigns Follow the Law?

May 2, 2009

Maybe it’s a local issue, but it bothers me.  It is illegal in many place (including the City of Pittsburgh) to put signs, even campaign signs, on public property.  Yet we are seeing dozens or hundreds of campaign signs for judicial candidates routinely violating the law.

Wouldn’t you think judicial candidates would be extra careful to make sure their campaigns follow the law when they promote their judicial campaigns?

Bob (tired of the clutter)

Commercial Law League of America – 79th Chicago Meeting: “A First Time Attendee’s Experience”

April 24, 2009

Now that I have my inbox somewhat under control, I would like to write about my recent experience attending the Commercial Law League of America’s (“CLLA”) 79th Chicago meeting.  While last weekend, April 16-19, was the CLLA’s 115th Convention and its 79th Chicago Meeting, it was my first experience at a CLLA function.

For those of you who are not familiar with the CLLA, the CLLA is a worldwide organization of attorneys and other credit professionals who are committed to excellence in the fields of commercial law, bankruptcy and insolvency.  One of the main thrusts of this organization is to protect and represent the interests of creditors in a multitude of commercial and legal settings.  The CLLA’s Chicago Meeting is a prime example of how the CLLA effectively achieves this purpose.

The Chicago Meeting was an abundant display of the legal, educational and professional services that the CLLA has to offer those not only in the credit industry, but the general business community.  From the informative educational programs to the interactive ask an expert sessions, the Chicago Meeting is a great way for an attorney or other credit professional to quickly become knowledgeable on a number of topics within the general business and credit communities.  Moreover, I found the Chicago Meeting to be an invaluable source for networking and meeting both prospective and current clients, as well as fellow attorneys.

Lastly, I must comment on the camaraderie among current members and their willingness to go out the way to make new members/first time attendees such as myself feel more than welcome at this event.  It was refreshing to witness such free flowing discussion not only about business matters, but also about each others social and personal affairs.  As a first time attendee, I can only hope that there will be many more trips to Chicago, which will inevitably lead to new friendships among colleagues and peers.

Bankruptcy – Who’s Responsible for This Mess?

April 15, 2009

Who’s responsible for this mess?

 

The facts of a recent bankruptcy case perfectly illustrate one aspect of the recent economic collapse – loan defaults. In the case, a 51 year old, disabled and unemployed debtor making approximately $5,000 per year from social security disability took a $20,000 cash advance from his credit card. The cash advance represented approximately three times his yearly income from social security disability. The debtor used most of the money to pay other bills, such as his mortgage and utilities. He spent the remainder of the money on miscellaneous items, such as clothing, food, and gasoline. One week after taking the cash advance, he filed bankruptcy and sought to discharge the credit card loan.

 

The creditor challenged the debtor and sought to have the loan declared “nondischargeable.” The creditor argued that the debtor committed fraud because it was clear that the debtor could not possibly repay the debt. The debtor’s response was that the credit card company never should have loaned an unemployed and disabled person living on extremely fixed income $20,000.

 

So who’s responsible? Was it the debtor for taking out a loan that he couldn’t possibly afford to repay? He was desperate to pay his bills and the credit was readily available.

 

Was the lender at fault for extending $20,000 in credit to someone making less than $5,000 per year? The lender argued that the credit card was opened when the debtor had significantly higher income and that the lender had no idea of the debtor’s disability.

 

Both sides have compelling arguments but, in my opinion, THEY’RE BOTH RESPONSIBLE. Borrowers should take responsibility for their actions and so should lenders. Pointing the finger at each other is the easy way out and does not solve the underlying problem. Similar incidents are playing themselves out across the county, only, in many instances, the “debtor” is a large bank, the “creditor” lending the money is an even larger bank, and the loans are more than $20,000; they’re more like $20 million. Everyone’s pointing the finger at the banks, but let’s not forget about the debtors that borrowed more than they could afford.

 

Unfortunately, the credit lending standards of the last few years were so loose and so easy that such a scenario was possible. The economy was healthy enough that the financial institutions were able to conduct little or no due diligence before lending large sums of money. Debtors (individuals, small and large corporations, and even federal, state and local governments) slowly began to rely on this “easy credit” access, resulting in deficit spending across the board.

 

As debtors began to get in over their heads and defaults began to occur on a large scale, the economy suffered. As the economy failed, everyone suffered, including those that acted responsibly. Responsible debtors that only borrowed what they could afford to pay back were hurt by the economy when their retirement assets lost value. Similarly, responsible lenders that conducted proper due diligence before extending credit suffered as investor confidence dropped and stock prices plummeted. Hopefully, individuals, corporations, lenders and government leaders alike will learn from these mistakes.

 

 

Has Bankruptcy Become a Certainty for U.S. Auto Giants?

April 2, 2009

            If this week’s events are any indication, it may no longer be a question as to whether General Motors Corp. and Chrysler, LLC. will file bankruptcy, but rather when and how long that bankruptcy will last. 

            On Monday, the Obama Administration forced out General Motors Corp. Chief Executive, Rick Wagoner, with the threat of withholding additional bailout money from the automotive giant.  This can be viewed either as a reaction to recent public outcry against executive bonuses and their pay, or a sign that the government has decided to rethink its philosophy regarding the distribution of bailout funds, including whether or not further bailouts are merited.  I tend to view it as the latter.    

 

On a side note, I must first point out that French automotive company, Peugeot Citroen, ousted its Chief Executive, Christian Steiff, on Monday, citing a need for a change in leadership to realize the company’s potential.  Peugeot Citroen is Europe’s second biggest auto maker by volume.  This removal highlights the fact that the continuing decrease in consumer auto sales is much more than a domestic problem.   

 

            However, here in the United States, Wagoner’s removal was followed by a press conference in which the President showed exactly how far his administration is willing to delve into the U.S. automotive business.  The Administration’s auto task force criticized then rejected both GM and Chrysler’s plans for restructuring their businesses.  The Administration made it clear that it believes that Chrysler will not be able to survive on its own, which has prompted Chrysler to amp up talks of a possible partnership with Italy’s Fiat.  More importantly, the President openly discussed the possibility of bankruptcy for General Motors Corp., and the effects of such a bankruptcy.  The President’s willingness to openly discuss bankruptcy as an option suggests that the Administration may now begin to realize that an amicable resolution of the problems facing the automotive industry is not possible.

 

            In addition to taking an integral role in the restructuring of the American automotive industry, the Administration announced three government programs aimed at jumpstarting domestic auto sales.  First, the President stated that the government would honor any warranties from General Motors Corp. and Chrysler, LLC. in an effort to encourage Americans to purchase their cars.  The President also announced a proposed program that would provide cash rebates to individuals for the purchase of a new more efficient car upon the trade in of an eight year old vehicle, or a vehicle getting eighteen miles to the gallon or worse.  Finally, the President highlighted a program to provide tax deductions of sate and locals sales taxes paid on the purchase of a new vehicle.        

 

            From a political standpoint, the President may be better served forcing the auto companies to enter into Chapter 11 bankruptcy.  If the Administration continues to become more involved in the restructuring efforts of GM and Chrysler, one of the problems that it will undoubtedly encounter is the unmanageable cost of United Auto Workers union retiree benefits.  Given union retirees reliability as Democratic constituents, it may be unlikely that President Obama will take the hard line stance with the UAW to gain concessions, which are most likely necessary to allow these companies to survive.  Another component to these events and the likelihood of bankruptcy is the “forced” partnership between Chrysler, LLC. and Fiat.  Our President may face harsh criticism if the government provides future bailout funds, composed of the American taxpayers’ dollars, to a company with such a large foreign component.

 

            From a legal perspective, the argument is quite simple.  Business reorganization/restructuring is exactly why we have Chapter 11 bankruptcy.  Admittedly, a bankruptcy filing by an automotive figurehead such as GM would result in the largest bankruptcy proceeding in the history of American jurisprudence.  However, bankruptcy court is the designated arena for the shareholder, worker and creditor disputes that ultimately prevent an amicable restructuring of a company.  Furthermore, a problem of this size and complexity is better served via the clearly defined procedures of the bankruptcy court, as opposed to the political influences and whims of Washington.   

           

            Do the above referenced events mean that bankruptcy is certain for General Motors Corp. and Chrysler, LLC.?  I would say only time will tell, but time is precisely what these automakers may longer have, as Present Obama has given GM and Chrysler deadlines of sixty and thirty days respectively to provide a restructuring plan that would justify further government support.

AIG

March 20, 2009

Count me amongst the people that were shocked by the AIG bonuses that came to light earlier this week. Having practiced in corporate bankruptcy for the past several years, it never fails to surprise me that so many struggling companies make large “bonus” payments to their executives, during a time in which the company is losing money and clearly heading for bankruptcy.
As a company begins to suffer financial losses and heads towards bankruptcy, the company’s executives have two options. They can forego bonuses and excess compensation in an attempt to keep the company solvent, or they can grab whatever they can before the company tanks. The problem facing our society right now is that executives in many large companies have no real ownership stake in the company in which they work. While “stock options” may provide some ownership interest, as stock prices of failing companies begin to plunge, the executives’ interest in seeing the company make a profit begins to fall as well. Since greed is always a strong motivator, the executives often begin to focus less on helping the company and more on helping themselves (i.e. overpay themselves now so that they can survive once the company is in bankruptcy and they are out of a job).
Fortunately, under bankrutpcy law, the trustee of a bankrupt debtor can sue the debtor’s former officers and directors for any excessive salary and/or bonuses they received during the one year period preceding the bankruptcy filing. Say what you will about the policy behind “preference actions” (a policy which I’ve criticized many times before), at the very least they provide an incentive for the executives to follow their fiduciary responsibilities to the company, instead of their selfish desire to overpay themselves.
If AIG ultimately fails and ends up in bankruptcy the consequences to the overall economy may be pretty bad, but at least the bankruptcy trustee will target AIG’s former executives and their undeserved bonuses.
Scott Schuster, Esq.

Pennsylvania Wage Attachment Law

February 11, 2009

 

The logic behind Pennsylvania’s arcane wage attachment law escapes me. I cannot figure out why the Commonwealth wants to protect debtors at the expense of legitimate creditors.  What are the drawbacks to adopting more liberal wage attachment laws? Who does it hurt? The vast majority of people pay their bills, in full, when they come due and would to be affected by wage attachment. Only small minorities of people do not pay their bills and I can see no reason why the legislature would want to protect those people. Unfortunately (and inexplicably), Pennsylvania has some of the most restrictive wage attachment laws in the country.

 

The vast majority of states allow commercial creditors to garnish a percentage of a debtor’s wages. For example, in Alabama and California, a creditor may attach up to twenty-five percent of a debtor’s “disposable” income (i.e. income remaining after paying certain “necessities,” such as food, shelter, taxes, etc.).

 

Only four states prohibit or severely restrict wage attachment. South Carolina is the only state that completely prohibits wage attachment. New Hampshire prohibits “continuous attachment,” which means that creditors must file a new lawsuit each time they want to garnish a paycheck (which is rarely cost effective). Texas allows wage attachment only to pay child support.

 

Similarly, in Pennsylvania, wage attachment is only available to pay taxes and child support. This is particularly problematic for creditors in Pennsylvania because Pennsylvania law prohibits execution against jointly owned (marital) assets unless a creditor has obtained judgment against both husband and wife.

 

Two justifications have been proposed in support of the restrictive Pennsylvania wage attachment law. First, the legislature is concerned that wage attachment will have the effect of forcing some debtors into poverty, thereby forcing the state to bear the cost of supporting those debtors. Second, supporters believe that wage attachment is counter productive because debtors, upon receiving less of their income and having less incentive to work, quit their jobs and apply for welfare.

 

In the coming weeks and months, I intend to contact our local state senators and congressmen about wage attachment in Pennsylvania. There may just be support to expand the attachment laws for the benefit of all Pennsylvanians. Stay tuned . . .