“He may have personal obligations that simply exceed what he can pay, and that’s one motivation,” said Charles Mooney, a law professor and bankruptcy expert at the University of Pennsylvania. “Or he could be quite solvent. His assets could be worth more than his liabilities; but if he isn’t liquid enough to have the cash to meet what’s coming due, then Chapter 11 would call a halt to all the payments in principal and interest and give him some time to try to sell some properties. Basically, it’s a way to get some breathing room and sort things out.”
O.K., FAIR ENOUGH. MR. Swig’s real estate, while immensely valuable, is kind of hard to turn into cash quickly. The automatic 100-day stay would allow him to do that, if that really were his intentions, and if he really couldn’t find a cash infusion from one of his wealthy relatives or colleagues.
Another advantage to filing for Chapter 11: It could allow Mr. Swig to diminish the burden of the very debt obligations that got him into this mess. According to Mr. Austin, if Mr. Swig were to file for Chapter 11 bankruptcy, his debt could be recalculated to allow for the depreciation of value in his assets. “If a secured creditor is owed $100,000, but the asset is only worth $80,000, in a Chapter 11, you can reduce the secured debt to $80,000 and the other $20,000 you can treat as unsecured debt,” Mr. Austin said.
And Chapter 11 is not very kind to holders of unsecured debt. “If you’re an unsecured creditor and the bankruptcy plan only calls for you to be paid 10 cents on the dollar, that means you will only pay 10 cents on the dollar and the rest of the debt will be extinguished.”
If you think it a tad unfair that our legal system has been constructed so as to allow wealthy individuals who gambled in real estate to shield their assets in LLCs, trusts and other illiquid forms from the claims of creditors, while Joe Schmo gets his house foreclosed on, well, you’re not the only one.
“That’s why, more than 10 years ago, they had a blue ribbon commission put together to revise the U.S. bankruptcy code,” said John Pottow, a professor of law at the University of Michigan. The panel came up with a bunch of proposals, including capping exemptions from bankruptcy.
The result: “It was soundly rejected by your and my elected representatives.”
Which means that Mr. Swig may well declare bankruptcy, endure some beatings in the press, pay off a portion of his debt, and emerge the same very, very rich man.
Mr. Swig wouldn’t comment for this story, but to play devil’s advocate, it is also possible, albeit unlikely, that he really could end up enduring “extreme financial hardship,” losing his assets, working at McDonald’s and living in a shelter in Queens like some sort of Trading Places character incarnate.
Then again, his definition of “extreme financial hardship” is probably a little bit different from that.
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