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A friend of mine shared this video with me the other day and I thought it was too good not to share. It’s a fantastic parody shining a light on the insanity of our national debt level. I hope you … Continue reading →

The much-publicized American Airlines bankruptcy case got more press last week when the company announced changes to plans it had published to terminate pensions for current and future retirees as part of bankruptcy cost-cutting measures.

Now, it seems, American will only freeze the pensions, and the freeze (at present) will only apply to ground crew members and flight attendants (pilots’ pensions will be handled differently; see below).

Employees whose pensions are frozen will not be eligible to receive additional benefits beyond what they have currently earned; however, they can expect to collect pensions when they retire, up to the amount they currently qualify for.

A Delicate Financial Game

The details of the pension negotiations demonstrate just how tricky a corporate bankruptcy case can be. Here’s a look at what’s going on behind the scenes as American attempts to figure out how to handle the pensions of its pilots.

• Before the bankruptcy, pilots for American (who received the largest pensions of all employees) had the choice of taking their pension payments over the course of their retirement or of taking an initial lump-sum payment, then collecting smaller payments during the course of their retirement.
• Prior to announcing the pension freeze, American apparently had plans to hand over the pension matter to a federal government agency, which would have likely instituted stricter limits on the amount of pay pilots could receive each year (at present, pilots who retire at 65 can earn $54,000 per year in retirement; older retiring pilots can earn more).
• In bankruptcy, American is hoping to eliminate the option for pilots to receive a lump-sum payment. The company is worried that pilots would retire en masse to collect their lump payments in a hedge against further financial problems that would lead to a government takeover (and smaller lump payments). American, it seems, is worried that it would lose so many pilots to retirement that it would be unable to continue flying planes.
• As many as a third of the pilots currently working at American would apparently earn less from their pensions if the federal government takes over payments.

As American’s bankruptcy negotiations play out, pilots and executives alike are attempting to hedge their bets to maximize their benefits. According to the Washington Post, however, American at present does not have enough money set aside to cover pensions as they now stand.

A failure to put enough money aside over the years led to the current shortfall, and unless the company is able to find additional money to transfer to pension funds during the bankruptcy reorganization, the future of employees’ pension payments remain hazy.

Join the forum discussion on this post Episode 99: Overcoming the Roadblocks to Debt Elimination Feb 28, 2012. Show notes: Today got off to a rough start but I managed to power through it. Our second computer crashed (the one … Continue reading →

A Westport, Connecticut, man has been sentenced to 30 months in jail for bankruptcy fraud crimes of nearly $1 million. Following his time behind bars, Daniel Steinberg will remain under the court’s supervision for three years, according to the Westport Patch.

Here’s a look at Steinberg’s crime and how fraud works in bankruptcy court.

Unauthorized Transfers

The fraud reportedly involved the business bankruptcy case of Reservoir Corporate Group, LLC, which filed a Chapter 11 case in 2009. Over the course of a year during the company’s bankruptcy, it seems that Steinberg transferred more than $700,000 from the company’s coffers to his own.

That money was apparently used to fund personal expenses as well as those of other businesses that Steinberg had a financial stake in. Because part of the Chapter 11 bankruptcy required that Steinberg, as debtor-in-possession of the company, file reports with the bankruptcy court, he also falsified the financial records of the company to cover up his fraudulent activity.

In August 2010, the bankruptcy court discovered Steinberg’s illegal transfers, and also found out that he had begun making such transfers before the company officially filed for bankruptcy

protection. All told, it seems Steinberg embezzled $968,973 from the company.

Bankruptcy Court Takeover

Once evidence of Steinberg’s fraud came to light, a Chapter 11 bankruptcy trustee took over control of the accounts in question. In addition to his jail time, Steinberg has been ordered to pay full restitution for the funds he embezzled, which might be difficult for someone who was shuffling money from a company in bankruptcy in order to cover his expenses.

But the penalties in Steinberg’s case are not unusual. In personal bankruptcy cases (Chapter 7 or Chapter 13), bankruptcy fraud can lead to penalties that include:

• Fines of up to $500,000, which usually align with the amount of money or value of property involved in the fraudulent transactions; and
• Up to five years in prison.

Because bankruptcy is handled at the federal level, bankruptcy fraud is a federal offense. While Steinberg’s case represents a blatant flouting of the rules of bankruptcy court, not all bankruptcy fraud is so glaringly obvious.

One reason the U.S. Court system recommends that individual bankruptcy filers work with an attorney is so that they can avoid accidental fraudulent behavior. In many cases, transferring ownership of property to a friend or family member in the months immediately preceding a bankruptcy filing can be construed as fraudulent by the bankruptcy court.

If you have questions regarding the potentially fraudulent appearance of your plans for a personal bankruptcy case, be sure to consult with a bankruptcy lawyer who practices in your state.

An ABC news interview with former federal bankruptcy judge Arthur J. Gonzalez, who oversaw the bankruptcy case of Chrysler, sheds new light on the role bankruptcy played for the big automaker. According to Gonzalez, the bankruptcy filing was essential to Chrysler’s economic recovery, and without it, the automaker would have not been able to continue operations.

Here’s a look at what affect that assessment might have.

Bankruptcy: A Hot Election Topic

One potential effect of Gonzalez’s comments is that they’ll impact the rhetoric Republican presidential candidates are hurtling on the campaign trail. Here’s why:

• Under Presidents Bush and Obama, Chrysler received $12.5 billion in federal loans. At present, Chrysler has repaid all but $1.3 billion of those taxpayer dollars.
• In addition to bailout money from the federal government, Chrysler filed for Chapter 11 bankruptcy protection to help ease the unmanageable debt burdens it had connected to pension plans for the auto workers’ union, among other expenses.
• Chrysler has, since filing its bankruptcy case, emerged from the court’s protection. Last quarter, the car company posted earnings of $225 million, indicating that it is once again profitable.
• Republican presidential candidates, who generally argue for smaller government and less government intervention in the private sector, have largely criticized the federal dollars that were loaned to Chrysler and the other automakers. On the campaign trail, many candidates have noted that the car companies should have gone through bankruptcy without help from the federal government.
• In his interview with ABC news, however, Gonzalez made clear that Chrysler had no funding alternatives to the federal government at the time that it received its cash infusion. In other words, no other lenders were willing to extend Chrysler credit to help it get back on its feet.

Today, Chrysler and the other Big Three automakers are once again profitable. If we are to believe Gonzalez, that profitability is thanks in large part to the bailout money provided by the federal government.

Because the carmakers are once again selling vehicles and turning a profit, the millions of Americans they employ still have their jobs. While this may seem like a boon for President Obama, under whom some of the bailout funds were dispersed, it will likely prove difficult to convince voters that any action “prevented” the loss of a job.

Much more dramatic (and visible) are the actions that directly eliminate or directly restore jobs.

Of course, Gonzalez’s claim that Chrysler would have been forced to liquidate (i.e. sell off its assets and close up shop) without help from Uncle Sam will likely be questioned, ridiculed, and dismissed by those who disagreed with the bailouts, even as it is heralded as gospel by those who supported them.

The time has come to make friends with the problems in your life. Ok. Maybe not real friends, but sorta kinda friends. The type of friends that you can wrap into a can’t-break-out-of-it kind of embrace until they share the … Continue reading →

My friend Kevin McKee over at thousandaire.com did a video a while back that does a great job explaining traditional IRAs and Roth IRAs. If I were going to explain it myself, I probably couldn’t do it much better than … Continue reading →

Ok, so this week was supposed to be the live airing of the 100th episode of the Living in Financial Excellence podcast. I was all pumped for the show and I even had a few cool things planned. Unfortunately, I’m … Continue reading →

Join the forum discussion on this post Episode 99: Overcoming the Roadblocks to Debt Elimination Feb 28, 2012. Today I welcomed financial coach Kevin Suddick back to the show to talk about the major roadblocks he sees with his financial coaching clients … Continue reading →

Every couple of weeks we like to take a moment and thank all the other blogs and websites that have mentioned or promoted us or our posts. They’ve been kind enough to say something about us, so we’d like to … Continue reading →