Updated: May 3, 2013 12:14PM
Originally published: November 19, 2002
United Airlines filed for bankruptcy. Why shouldn’t you? United made it look easy. Within a few hours the CEO was greeting employees and customers at O’Hare, holding a press conference, and promising that flights would continue to depart and arrive on time. Employees continue to show up for work. Frequent flier miles will continue to accrue and will be honored.
So, in spite of huge headlines about the biggest airline bankruptcy ever, what’s the big deal?
Well, the Savage Truth is there’s a lot of difference between an individual and a corporate bankruptcy. And it’s painful to find that out firsthand.
In United’s case, there’s bound to be a lot more pain than the first week’s headlines reveal. Many will face job losses. Others will lose money. The 32,000-page list of creditors includes large banks and small suppliers--all of which will have to take a writeoff, or wait years to get some small portion of their bills paid. A writeoff is the corporate name for the black hole called total loss.
Writeoffs come out of profits, which means lower stock prices for public companies that lent money. Their shareholders may suffer. Or we may all be charged more when we do business with those companies, to make up for loan losses on the United bankruptcy.
Some of the very same creditors who are faced with losses will lend new money--debtor-in-possession financing--with the assurance that they will be repaid first out of new cash coming in the door.
Why would the lenders take the risk?
Well, not only do they move to the head of the line for repayment on these new loans. But many lenders would like to see United continue to operate, with the future hope of getting some repayment on their old loans. So they’ve become virtual cheerleaders for United in the bankruptcy process.
You’re on your own
And that’s where the similarities end between United’s bankruptcy and your bankruptcy.
No one is your cheerleader when you file personal bankruptcy. A Chapter 7 personal bankruptcy filing will wipe out all your debts. A Chapter 13 personal bankruptcy filing will allow you to keep some of your assets, and make payments to the court, which will distribute money to your lenders. A judge decides how much you keep, and how much you pay. You lose all flexibility to reorganize your life, because the court does it for you. Fail to make scheduled payments, and you could lose everything.
Some debts survive bankruptcy: child support, student loans and federal taxes. And bankruptcy lives on your credit report for 10 years, affecting everything from future job interviews to the price you pay for life insurance or credit years down the road.
So why will a record 1.5 million individuals file bankruptcy this year? Some do it for legitimate reasons: job layoffs, uninsured illnesses, divorce or a change in lifestyle that destroys their savings.
Saving the house
Others do it as a way to stop mortgage foreclosures, which are now running at a 30-year high. Currently 1.23 percent of all homes are in foreclosure, far exceeding the 1 percent levels of the 1990 recession, and nearly double the levels of the 1982 recession. And we aren’t even officially in a recession!
Filing for bankruptcy stops mortgage foreclosure action, for a while anyway.
Home equity loans have made the problem worse. As unemployment climbs, the foreclosure trend can only worsen. Too many homeowners have already cracked the piggy bank of their home equity, and nothing but bankruptcy stands between them and losing their home. And without a job and an income, there’s no hope at all.
Creditors may be cheering for United to keep flying, but in a personal bankruptcy they want your remaining assets, including your home.
Our country doesn’t have debtors prisons. We believe in giving people--and airlines--a chance to start over. You may even get more than one chance.
But a new, more stringent bankruptcy bill is very likely to be passed by Congress next year. If the stigma of bankruptcy has faded, the cost will be higher. And the pain will be greater.
And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. Send questions via e-mail to email@example.com. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.