Birmingham, Alabama to file for bankruptcy relief?
Although, there were issues already in place prior to the recession, this potential bankruptcy filing will be the largest governmental filing in our history. The implications and impact of the filing will be quite severe and create a ripple effect on the regional economy.
For our fellow fans in Birmingham, buckle up! because this ride is going to be a rocky one.
New financial clouds leading Jefferson County to take another look at bankruptcy
Bond bill, job tax looming
Wednesday, September 02, 2009
BARNETT WRIGHT
News staff writer
Two looming financial clouds – including a $105 million bond payment due Sept. 15 – are pushing Jefferson County to take a new look at whether it must file for bankruptcy, County Commission President Bettye Fine Collins said Tuesday.
The quandaries pressing the county are:
The general obligation bond payment due in two weeks, which the county does not have the money on hand to cover. The county owes the money to two banks for an accelerated principal and interest payment on non-sewer debt.
The possibility of having to repay $22 million in occupational tax revenues that the county was allowed to spend from January, when a judge ruled that the county’s authority to levy the tax had been repealed, through May.
“There is no doubt in my mind we won’t be able to resolve all of this by Sept. 15,” Collins said.
In addition, the county still has no agreement with creditors for how to repay $3.9 billion owed on its sewer debt – a debt so large and complex that it threatened to overwhelm the county long before the current economic crisis took root.
Two commissioners – Republicans Bobby Humphryes and Jim Carns – have long called for the county to seek protection under Chapter 9 of the U.S. Bankruptcy Code. Collins, a Republican, has led a coalition with Democrats Shelia Smoot and William Bell opposing bankruptcy.
While Collins said she still doesn’t endorse filing what would be the largest government bankruptcy in U.S. history, she says she now cannot rule it out.
Collins said county attorneys have discussed how the county would undertake a possible bankruptcy.
“I’ve said all along that I do not support that,” she said. However, if the attorneys determined bankruptcy was the county’s only solution, Collins said, she would reconsider.
Imagine life without high scool football games, homecoming, prom, or student governement
The recession has impacted life as we know it many ways. We have seen its impact by the surge in the number of bankruptcy petitions filed in the past few years. The economies financial struggles have also hit our school systems.
Last year, my son’s high school laid off 16 teachers in an effort to deal with severe budget cuts due to the school system’s financial problems. It was sad to see happen. Most of the teacher’s who lost their position were the younger ones who had only been there a year or two. One of the teacher’s to lose their job was the assistant wrestling coach. The cut in jobs, coupled with the almost unilateral state-wide hiring freeze, has left recent college graduates in Georgia scrambling to find employment.
The cut in teaching positions may only be the beginning in a transformation of high school as we once knew it. This article really hit an emotion chord with me as high school sports were such a gigantic part of my life. How much of this is necessary result of the financial woes of the school system versus a tactic of fear mongering?
At some schools, budget cuts put the kibosh on sports
By Marlen Garcia, USA TODAY
Instead of gearing up to run cross country for Grove City High School in Ohio, Andy Bennett is training for a marathon.
It will give the 16-year-old some consolation because sports programs and clubs at his school have been shut down. An hour after the last bell each afternoon, it’s lights out at the school.
Bennett and his classmates won’t have homecoming, prom or a student government — activities that, like sports, are fixtures in American high schools but no longer exist at Grove City because of a financial crisis.
That’s the plight of all students who attend South-Western City Schools, which serves part of Columbus and nearby towns and is Ohio’s sixth-largest school district. The district has been in dire financial straits for years and is being squeezed further by the economic downturn. By canceling activities, the district cut $2.5 million in expenses, district spokeswoman Sandy Nekoloff says.
“I thought it was the worst thing in the world,” Bennett says of the school board’s decision to cancel activities after a proposed property tax hike was rejected by voters in August, the third time it failed.
In this district, no one has been spared, not even Grove City High’s marching band. “There’s no football games. There’s nowhere for the marching band to march,” Nekoloff says.
High schools across the USA are reporting that the recession has led to similar financial difficulties for extracurricular programs, forcing cost-cutting that is particularly painful now, as fall sports seasons open. From Hawaii to Rhode Island, school systems are trimming compensation for coaches, eliminating transportation, adding or increasing athletic fees for students, holding fundraising drives, cutting back on night games to save electricity costs and dropping some sports and related events altogether.
In Nevada, this “is going to be the worst year financially for school districts in history — and 2010-11 is going to be worse,” says Eddie Bonine, executive director of the Nevada Interscholastic Activities Association. “We may be told to do more next year.”
In Michigan, Jamie Gent, athletics director at Haslett High near Lansing, says, “There’s no money, period. We’re coming to a stage in the next three years that if things don’t get better, (it could damage) sports altogether. Who do you pick? What stays? What sport doesn’t stay?”
Bennett says he was close to transferring to a school outside his district so he could earn his third varsity letter in cross country. His parents were willing to pay more than $3,000 for him to attend an out-of-district public school or private school, he says.
He knows of other families who are paying steep tuition so their teens can play sports.
Such a move from Grove City would have been difficult academically and socially, Bennett says. He is a top student taking Advanced Placement courses and didn’t want to hurt his chances of getting into his dream college, the Air Force Academy. “I’ve been in the Grove City public system forever,” he says. “Switching to another school with no friends was not very appealing.”
Some athletes may miss out
The mood at school is grim, others say. “We’re going to have all these idle hands,” says Drew Eschbach, who was the cross country coach.
Top-tier athletes will be OK, Eschbach says, because they will transfer to schools with better-funded programs or form their own clubs. He says he worries about average athletes who will miss out on the collegiality and sense of belonging that a team or club can provide.
Some in the community have accused school system officials of canceling activities to strong-arm residents into passing a tax increase. Nekoloff says activities were canceled after other cuts failed to help solve the financial problems. “We’ve had $22 million in reductions and more than 330 positions reduced over the past three years,” she says.
Residents will vote on a scaled-back property tax increase in November. The district estimates the new proposal would cost the owner of a $100,000 home an additional $18.89 a month in property taxes. The median household income for the area was $54,965 in 2007, according to the U.S. Census Bureau.
Pay-to-play plan considered
District officials are studying a pay-to-play model, which increasingly has been used across the country. Nekoloff says if South-Western’s proposed tax increase passes, the board could bring back activities under this system and students would share costs with the district.
At most schools, pay-to-play fees cover a portion of a team’s expenses and school districts kick in the rest. But those amounts can be disproportionate, as is the case at Brighton High School in Michigan.
Brighton offers 32 sports and fields 98 teams, enviable by any school’s standards. But the district funds only 38% of the athletic department’s nearly $1.5 million in expenditures; the other 62% is self-generated through fundraisers and fees, athletics director John Thompson says.
Athletes pay $175 a sport, although the fee for a third sport is waived. Students also pay transportation fees ranging from $30 to $70 a sport. Fees are waived for those with financial hardship.
“We’ve started chipping away at the model that existed when I was a kid,” Thompson says.
“Unfortunately, one day sports will be out there for people who have money. We can say we’ll take care of those without money, but I can tell you it will be the kids with talent. The average kid is going to get left behind. That whole development factor, they’re going to miss out on it.”
“I am not filing if I cannot do a chapter 7″
I hear this statement on a daily basis. “I do not want any part of a chapter 13. I am only interested in filing a chapter 7.”
I think anyone who knows anything at all about bankruptcy would concur that, all other things being equal, a chapter 7 filing is a more attractive scenario. Unfortunately, there are many people who either don’t qualify for a chapter 7, or who have circumstances that make a chapter 134 filing necessary.
The “means test” imposes a objective analysis on an individual’s disposable income. There is very little room for creative “lawyering” to affect the outcome. Note, that there is some and choosing the right attorney may make the difference in a borderline case.
The focus of this post is to get some information out there on the chapter 13 and perhaps clean up some of the myths that have led to its negative stigma.
First, not all chapter 13 filings are simple repayments of the filer’s debt in full. In fact, less than 20% of my clients are in a 100% case. A debtor is required to commit his disposable income for a set commitment period. For example, if the debtor’s means test returns a calculation that there is a disposable income of $200 per month, the debtor must contribute this amount for a commitment period of 60 months. Doing the math, this would require the debtor to pay the unsecured creditor $12,000 to complete the plan and receive a discharge. This $12,000 base is all that the debtor need pay the unsecured creditor regardless of the overall balance he may owe to them. Taken this example one step further, assume that the debtor has $48,000 in unsecured debt. A filer would only have to pay back 25% of his debt. Upon completion of these plan payments, that debtor will receive a discharge of liability on the remaining 75%. In contrast to a similarly negotiated settlement outside of the bankruptcy arena, the debtor will NOT be responsible for any tax consequences with a forgiveness of debt 1099.
Second, the debtor has the “light at the end of the tunnel”. An individual who forgoes the chapter 13 plan would have the uncertainty and unknowns of when, if and how the debt will be resolved. The individual will not be able to control harassing phone calls, lawsuits for breach of contract, tacked on charges to continually increasing the debt owed to the creditor. A chapter 13 plan freezes the debt owed to the creditors into a set dollar amount (and often at a court-ordered discounted percentage). This light gives the filer a finish line with a date in which they know their financial problems will be resolved. This light will also lift a burden weighing on them and enabling them with the ability to focus on other aspects of their life and becoming more productive.
Finally, there is normally not an alternative. At the heart of the issue, the individual’s reluctance to commit to a chapter 13 is often premised on the fear of being forced to set their life on a fixed budget or a restriction to incur additional debt. It is these factors that frequently are the exact reason the person is in the financial predicament that they are in. A chapter 13 is often exactly what the doctor order to get one on track and with the proper habits to become a more fiscally sound individual.
The Credit Squeeze in the Car Industry
I wrote a post a week or so about the bad mortgages that were written out there to people who couldn’t afford them. My question was posed to ask “Who was to blame for the problem?”
In today’s post, I continue with my analyzation of consumer loans, but specifically would like to address the car loan industry. If you having been reading the paper (I have attached an article from CNN in yesterday’s online edition) the car industry is going through an equally devastating blow as the real estate market. Many dealers who have been around for decades have had to close the doors. Sales have plummeted, and we all know this has ultimately even forced one of the big three automakers into the bankruptcy world.
The cause for the car industries problems is the credit squeeze that has unilaterally been imposed across industries from the local banks, credit card companies, to even the brand lenders like Ford Motor Credit. The dealers are not able to move cars because they are not able to provide a credit product to consumers who wish to purchase their product, and we all know it take financing for most Americans to purchase a vehicle.
The credit squeeze does not stop at the consumer level. It is true that it harder for one to get the creative financing with bad credit or no income that was available in the past. However, the additionally devastating squeeze by the lenders has been directed at the dealer’s lines of credit to enable them to house an inventory of vehicles. This credit line is often referred to as “floor plan” loans. These loans enable the dealer to have the inventory that buyers will browse when they are purchasing a vehicle, and without this product, a dealer would not have the parking lot of cars to sell.
I have to throw this out there. I am not certain how much I believe this to be the cause of the credit problems in our economy, but nonetheless it must be a factor and the timing of this is all too coincidental for there not to be any connection. In October of 2005, a new set of bankruptcy laws went into place to reform a system that was seen by some to have too many avenues for abuse. The system was to make the bankruptcy process more objective and also make the ability to obtain different forms of relief more difficult.
To be a little more specific with an example, and to stay in line with the topic of this post, a constraint was placed on the debtor’s ability to employ a “cram down” of vehicles in which they were upside down on the loan. A “cram down” allowed the debtor to pay only the FMV at a lower interest rate and still allowed them to retain the vehicle. The portion of the loan that was unsecured and crammed down would than fall into the unsecured pot. This cram down is still a tool found in the code, but now is only available to debtor’s who purchased/financed their vehicle more than 910 days before the filing of their bankruptcy.
This change in the cram down code section, along with many other “creditor-friendly” code modifications, came after aggressive and relentless lobbying by the big banks in the formation of the new bankruptcy bill. It is my hypothesis that it is this kind of over-reaching and greedy moves by the lenders that has came back to bite them. A direct result in this new policy was for the debtor’s to surrender a much higher percentage of the vehicles in formation of the chapter 13 plans. The banks have to accept more and more voluntary surrenders form the debtor, and this in turn, has led to all of their loans falling into the unsecured status.
The lenders got all they asked for but I don’t think they realized the impact. It reminds me of a carton in which the boy stumbles upon a genie in a bottle. After learning of its powers, he starts making outlandish wishes only to find that too much ice cream, video games, or television really is not quite as good as it sounds and the give-it-all-to-me effect leaves the boy with a bellyache, etc. So here, in an effort by the finance companies to try to scrape in the few extra dollars that were lost in a cram down, the entire credit model may have gone out of whack. I know for certain that I and many other bankruptcy attorneys are filing way more chapter 7s than we were once were, because the debtors no longer have the tools and ability to retain the vehicles in a chapter 13.
Credit lines dry up for auto dealers
To help ailing auto dealers, the Small Business Administration launched new loan offerings — but so far, few banks are playing along.
NEW YORK (CNNMoney.com) — Most small businesses are having trouble finding loans and credit lines these days, but auto dealers are in their own special financing hell. Their inventory is expensive, their industry is in shambles, and their largest lenders are in tatters.
Recognizing that dealers need help, the Small Business Administration began rolling out new programs tailored for them. Four months in, the new programs are drawing a tepid response from lenders. A pilot project launched in July to back inventory loans to auto dealers has so far approved just one loan, according to the SBA.
“There’s been no progress in freeing up credit,” says Scott Gorden, principal in charge of dealerships at LarsonAllen, a Minneapolis-based accounting firm that works with 600 dealers across the country “Far and away, it’s still the biggest issue faced by dealerships today. If you cut credit to them, they’ll be closing. If they can’t get the floor plan financing, they will shut down.”
Auto dealers’ credit troubles started almost a year ago, as banks tightened their credit standards for small businesses in response to the deepening recession. But a bigger problem came when industry-specific lenders like Chrysler Financial, General Motor Acceptance Corp. and Ford (F, Fortune 500) Credit began to pull back.
“They first became protective of their brand. So a Ford-Subaru-Volkswagon dealer would only get financed from Ford Credit for the Ford brands,” Gorden says. “But then they started taking a look at the less profitable dealerships, and we had a number of clients who got notice from the [lender] or the bank that the financing would end in 30, 60, 90 days.”
Todd Gailas, executive manager of AutoMax in Greenville, N.C., is among those who had his financing cut off. Gailas’s independent, used-car dealership has sold a variety of brands in the past 10 years, using a $3.1 million credit line from New South Federal Savings Bank, a regional bank based in Birmingham, Ala. On January 27, Gailas received a letter notifying him that his credit line was on “cease and desist” status. The bank gave him 60 days to find an alternative credit source.
“Even though I’ve had eight previous, perfectly paid loans and I’m the number-one retailer of pre-owned vehicles within 50 miles, I can’t get floor plan financing,” he says. “They think the loans are toxic, and with all the audits going on, they’re not willing to take on that kind of loan.”
The SBA has two new initiatives aimed at helping dealers like Gailas. In early May, the agency temporarily stretched its size standard of what counts as a “small” business, a move specifically aimed at making more car dealers and auto industry suppliers eligible for a government-backed loan. The SBA insures up to 90% of qualifying small business loans against default, reducing the risk for lenders.
But the initiative had a major flaw. Although more auto dealers became eligible for the SBA’s loan programs, the SBA does not cover “floor plan” loans, the main kind of financing used by auto dealers. A typical floor plan loan is a revolving credit line that a dealership uses to purchase vehicles. As the cars and trucks sell, the dealership pays down the loan.
Without floor plan financing, a dealership can’t operate. The SBA set out to fix the problem. In July, the agency launched a pilot program offering government guarantees on floor plan credit lines that are between $500,000 and $2 million. Like other SBA loans, these credit lines are administered by banks and other SBA lenders — a list that includes few of the auto industry’s traditional credit institutions.
The SBA will insure up to 75% of the value of loans made through its floor plan financing pilot program. The program will run through September 2010, at which point the SBA will decide to whether terminate it, extend it, or make floor plan financing a permanent loan product.
Gailas heard about the SBA’s initiative and began hunting for a willing lender. At one bank, he asked them to consider the SBA’s 75% guarantee and offered to put a Certificate of Deposit in the bank to cover the other 25% of the loan. But the lender turned him down, he says, because it didn’t want to do a deal with anyone in the auto industry.
Gailas has approached 20 banks so far and been turned away each time. In the meantime, he’s been without credit and unable to restock his inventory. Sales have plummeted 60% and he’s had to cut his staff of 24 down to nine. Without a credit line, Gailas is worried about his dealership’s survival.
“I’m in dire straights and I’m confused about where to go from here,” he says.
So far, just one loan has been approved through the floor plan lending project, although the SBA says others are in the queue.
Gorden isn’t optimistic. “Big banks are not doing the program because of the size. Two million is too small. Most of the big banks, their floor plan lines are $5 million, $10 million, $20 million or more,” Gorden says. “And the smaller banks and credit unions don’t have the expertise to manage a floor plan landscape.”
Unlike other loans, revolving floor plan lines of credit require the lender to manage its ongoing risk by tracking the inventory used as collateral, which means a lot of paper shuffling for the lender. But some experts don’t buy that excuse.
“There’s no question that if you were to line up the different categories of potential commercial lending, floor plan lending does have a greater set of burdens and costs associated with it because of the nature of the loan,” says Doug Greenhaus, director at the National Automotive Dealers Association. “But you can hire [companies] to do the back-end work.”
Greenhaus is frustrated that lenders are blackballing the entire auto industry and refusing to evaluate specific businesses on their own merits. “I don’t care how bad the economy is,” he says. “There are people who lose money and people who still do very well and make money.”
For Gailas, his dealership, and his staff, the time for finding a solution is running out.
“In the eyes of everyone else, one business doesn’t matter,” he says. “But the ripple effect is ridiculous — the insurance company we’re with won’t have our policy, the [auto] service company across the street won’t have our business, my employees won’t have jobs or health insurance, our tax dollars in property and income will be gone, and so on.”