tag:theconversation.com,2011:/au/topics/bankruptcy-7093/articlesBankruptcy – The Conversation2023-11-23T17:27:00Ztag:theconversation.com,2011:article/2179092023-11-23T17:27:00Z2023-11-23T17:27:00ZWeWork approached physical space as if it were virtual, which led to the company’s downfall<figure><img src="https://images.theconversation.com/files/560964/original/file-20231122-24-25kyz6.jpg?ixlib=rb-1.1.0&rect=53%2C0%2C6000%2C3997&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The pandemic shifted work patterns and reduced the need for space, including shared offices.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/wework-approached-physical-space-as-if-it-were-virtual-which-led-to-the-companys-downfall" width="100%" height="400"></iframe>
<p>On Nov. 6, the co-working firm WeWork filed for bankruptcy. WeWork, founded by Adam Neumann and Miguel McKelvey in 2010, had a simple business model: it signed long-term leases on urban buildings, fitting them out with modern work facilities. Then, it rented out desks, offices and meeting rooms to companies and freelancers seeking an easy-come, easy-go workplace.</p>
<p>WeWork was, in short, <a href="https://www.businessinsider.com/working-in-a-wework-2016-7">in the office subleasing business</a>.</p>
<p>Yet Neumann promoted the firm as if it were a tech company, peppering his presentations with the buzzy language of Silicon Valley. He promised clients his offices would boost workers’ social interaction, leading to untold innovations. The company even <a href="https://www.wired.com/2014/11/wework-commons/">developed an online social network, WeWork Commons</a>.</p>
<p>But the true “platform” for communication and collaboration, Neumann said, was the office space itself. He described WeWork as a “<a href="https://www.ft.com/content/f2e073a2-d0ef-11e5-831d-09f7778e7377">physical social network</a>” offering “<a href="https://www.wsj.com/articles/wework-is-valued-10-times-greater-than-this-profitable-public-rival-11566298801">space as a service</a>.”</p>
<p>WeWork’s collapse casts doubt on analogies between physical workspaces and computers that have proliferated in recent years. Is an office — where people go to work in the morning, sit at desks and talk across conference tables — best understood as a piece of digital infrastructure? </p>
<h2>Digital daydreams</h2>
<p>When Neumann cast offices as a form of information technology, he traded on an idea — wildly popular in the 2010s — that the boundary between physical space and computers was dissolving. </p>
<p>Business leaders and tech journalists predicted a soon-to-be-pervasive “<a href="https://www.bbc.com/news/business-15004063">internet of things</a>” (physical objects with embedded transmitters, so they can exchange data), the rise of “<a href="https://www.greenbiz.com/article/market-smart-city-technology-reach-16b-year-2020">smart cities</a>” (where municipal services are digitally monitored and optimized), and a new collective life in “<a href="https://edition.cnn.com/2009/TECH/10/24/tech.augmented.reality.apps/index.html">augmented reality</a>.”</p>
<p>These ideas are all based in real technology, but were caught up in a vortex of accelerating hype around the time WeWork was founded.</p>
<h2>Cybernetic architecture</h2>
<p>There’s a deeper history to predictions like this. In the 1960s, radical architects were enthralled by the rising field of computer science. They fantasized about buildings that would be as dynamic and responsive as a computer. These visions often had a countercultural tinge. For example, British architect Cedric Price <a href="https://www.moma.org/collection/works/845">designed a giant cultural centre</a> whose rooms would rearrange themselves in real time with the help of a digital algorithm and a built-in crane.</p>
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<p>Hungarian-French artist Nicolas Schöffer tried the idea at an urban scale, <a href="https://www.naimaunlimited.com/biblio/nicolas-schoffer-la-ville-cybernetique/">imagining a “cybernetic city”</a> where citizens could alter their surroundings with the touch of a button. </p>
<p>And Japanese designer Kenzo Tange <a href="https://www.proquest.com/docview/1304275244">conceived buildings as giant communication apparatus</a> with corridors serving as “information channels.”</p>
<h2>Office as platform</h2>
<p>The digital pipe dreams that inspired these radical visions also filtered into the prosaic task of designing corporate offices. Earlier in the twentieth century, offices were thought of as, essentially, industrial buildings. They were factories for paperwork, with documents passing from one desk to another like a car part down an assembly line.</p>
<p>But during World War II, executives witnessed the military use giant mainframes for logistics and deciphering codes. Afterwards, many started thinking of an office filled with workers as a kind of computing infrastructure. </p>
<p>The influential West German consultant Eberhard Schnelle described an office as an “information processing facility, one in which information processing plays out <a href="https://doi.org/10.5169/seals-331536">between people and within people</a>.” To Schnelle, an office was like a programmable computer, with an algorithmic intelligence defined largely by its distinctive configuration of desks.</p>
<p>Amid the booming knowledge economy of the 1960s, CEOs loved the idea that they could improve office work just by freeing up the flow of communication. This theory inspired new office furniture like Herman Miller’s <a href="https://www.wired.com/2014/04/how-offices-accidentally-became-hellish-cubicle-farms/">Action Office</a> line of desks, shelves and partitions. </p>
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<p>Managers would constantly optimize the flow of information through the office by adjusting the layout of the modular desks, like a programmer feeding an updated algorithm into a mainframe.</p>
<p>That was the idea, anyway.</p>
<p>The fantasy that offices were as dynamic and frictionless as a computer program obscured the fact that real estate is stubbornly physical. As office buildings age, they need constant maintenance. Changing the interior is a messy undertaking. Even rearranging supposedly flexible desks and partitions may involve hundreds of specialized parts. And at the end of the day, there’s no guarantee it will improve how people work.</p>
<h2>The WeWork crash</h2>
<p>Analogies between offices and computers faded during the recession of the 1970s. But they never really died out — especially in the San Francisco Bay Area, where digital networks found a <a href="https://press.uchicago.edu/ucp/books/book/chicago/F/bo3773600.html">surprising following among ex-hippies seeking alternative forms of community</a>. When Neumann and McKelvey founded WeWork in 2010, few Silicon Valley investors stopped to question their analogy of an office to a social network.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/560965/original/file-20231122-17-d3tx1p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="four people sitting around two tables in a coworking space" src="https://images.theconversation.com/files/560965/original/file-20231122-17-d3tx1p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/560965/original/file-20231122-17-d3tx1p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=333&fit=crop&dpr=1 600w, https://images.theconversation.com/files/560965/original/file-20231122-17-d3tx1p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=333&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/560965/original/file-20231122-17-d3tx1p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=333&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/560965/original/file-20231122-17-d3tx1p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=419&fit=crop&dpr=1 754w, https://images.theconversation.com/files/560965/original/file-20231122-17-d3tx1p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=419&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/560965/original/file-20231122-17-d3tx1p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=419&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Co-working spaces like WeWork marketed their social networking opportunities as a benefit to members.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>Their enterprise rode a wave of enthusiasm for all things digital, and secured ever larger investments from tech venture capitalists. Yet, as analysts pointed out in retrospect, <a href="https://www.penguinrandomhouse.com/books/645810/the-cult-of-we-by-eliot-brown-and-maureen-farrell/">the business model of a tech firm never made sense for WeWork</a>. A real estate company does not enjoy the same economies of scale or network effects as an online platform. Finally, in 2019, WeWork could no longer hide the fact that it was still losing money.</p>
<p>The company’s bankruptcy brings this saga to a close. It also casts doubt on the idea that more communication and connectedness are always better — an article of faith derived from the flower-child utopianism of early Silicon Valley.</p>
<p>Conflating physical space and digital platforms flattens the richness of social interaction into the linear logic of an algorithm. WeWork promoted the virtues of socializing, but only with fellow white-collar millennials — and always with an entrepreneurial sense of self-promotion. </p>
<p>Imagining buildings and cities as digital platforms erodes a sense of place where one could have a palpable sense of belonging, with a legible relation to the <a href="https://press.princeton.edu/books/paperback/9780691208053/a-city-is-not-a-computer">public realm</a>.</p>
<p>Predictions about the future of the office often hang on fantasies of an imminent work revolution that never actually takes place. If history is any guide, office design and online systems will keep evolving in parallel, as distinct — and often complementary — technologies for work. The office will remain a place, not a platform.</p><img src="https://counter.theconversation.com/content/217909/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joseph L. Clarke receives funding from the Social Sciences and Humanities Research Council of Canada.</span></em></p>WeWork’s bankruptcy casts doubt on hype that the boundaries between physical space and computer technology are dissolving.Joseph L. Clarke, Associate Professor, History of Modern Architecture, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2134132023-09-19T14:47:48Z2023-09-19T14:47:48ZBankruptcy is spiking among UK borrowers – but there are debt relief options if you are struggling financially<figure><img src="https://images.theconversation.com/files/548392/original/file-20230914-27-46idox.jpg?ixlib=rb-1.1.0&rect=0%2C7%2C4867%2C3561&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-attractive-woman-looking-stressed-worried-1258658701">SB Arts Media/Shutterstock</a></span></figcaption></figure><p>UK households have one of the <a href="https://invezz.com/stocks/debt-countries/">highest debt levels in the world</a>. Steadily increasing in the last two decades, the <a href="https://themoneycharity.org.uk/money-statistics/">average total debt per household</a> (including mortgages) is £65,619 as of August 2023. This is £34,644 per adult, or around 103.5% of average earnings.</p>
<p>As indebtedness has steadily increased over the last two decades, household bankruptcies have quadrupled, reaching around 200,000 filings in 2022. One of the main reasons of this increase is arguably the <a href="https://www.legislation.gov.uk/uksi/2002/1307/made">2002 UK bankruptcy reform</a>, which made it easier for people to file for bankruptcy. </p>
<p><strong>Consumer bankruptcies are rising in the UK</strong></p>
<p>While the use of some types of debt relief agreements have fallen in the year to August 2023, <a href="https://www.gov.uk/government/statistics/monthly-insolvency-statistics-august-2023/commentary-monthly-insolvency-statistics-august-2023#company-and-individual-insolvencies-in-england-and-wales">according to the latest government figures</a>, registrations for the government’s <a href="https://www.theguardian.com/money/2019/jun/19/uks-problem-debtors-to-get-60-day-breathing-space">“breathing space” scheme</a> – which gives debtors 60 days relief from pursuit by creditors – grew by 19% over this time.</p>
<p>The <a href="https://www.bbc.co.uk/news/topics/cljev4jz3pjt">cost of living crisis</a> is probably one of the main reasons for this spike in bankruptcy figures. Families across the country have been struggling to keep up with the rising price of essential goods and <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">increased borrowing rates</a> since mid-2021. At the end of last year, UK pay adjusted for inflation also <a href="https://www.theguardian.com/business/2023/jan/17/real-terms-uk-pay-fell-fastest-20-years#:%7E:text=7%20months%20old-,Real%2Dterms%20UK%20pay%20fell%20at%20fastest%20rates%20for,years%20at%20end%20of%202022&text=Average%20real%2Dterms%20pay%20in,the%20cost%20of%20living%20crisis.">fell at the fastest rate</a> in 20 years.</p>
<p>Other factors can also trigger bankruptcy, however. Our <a href="https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2859">recent study</a> highlights two main reasons. First, we found that people tend to go bankrupt strategically – if they can financially benefit from it. This often happens when a person’s debt is far greater than the assets they have to liquidate (or sell) as part of the bankruptcy. </p>
<p>Second, adverse life events such as divorce, serious health problems or sudden unemployment can cause financial distress. This often takes the form of loss of income and further borrowing. This affects people’s ability to repay their debt, eventually leading to bankruptcy.</p>
<h2>The options when struggling with debt</h2>
<p>Filing for bankruptcy is a formal process for cancelling your debts (also known as discharging, or <a href="https://aib.gov.uk/bankruptcy">sequestration</a> in Scotland) if you are having trouble making repayments. Consumer organisations such as <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy/before-you-go-bankrupt/check-if-going-bankrupt-is-right-for-you/">Citizens Advice</a> in the UK can provide information to help you decide if bankruptcy is the right choice for you.</p>
<p>If you do decide to declare <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy/">bankruptcy</a>, a court issues a bankruptcy order after an application by you or one of the people you owe money to (your creditors, for example a bank or a supplier if you are a business). Full discharge from debt usually happens 12 months after a bankruptcy order is granted.</p>
<p>But bankruptcy isn’t the only option if you’re struggling financially. A <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/debt-relief-orders/">debt relief order</a> (DRO) is a simpler, faster process for people with low income, fewer assets and debts of less than £30,000. When a DRO ends, typically after 12 months, most of your debts will be written off but some types aren’t covered. So, it’s important to <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy/how-bankruptcy-affects-you/check-which-debts-bankruptcy-covers/">check what types are included</a> under this arrangement. </p>
<p>Alternatively, you could enter into an <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/individual-voluntary-arrangements-ivas/">individual voluntary arrangement</a> (IVA), which is a contract with your creditors. There is no maximum limit to the amount of debt that can be included in an IVA but at least 75% of your creditors have to agree to the plan. An <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/administration-orders/">administration order</a> (AO) is a simpler version of this for people with debts of less than £5,000. In Scotland, a <a href="https://aib.gov.uk/protected-trust-deed">protected trust deed</a> (PTD) provides the same kind of agreement.</p>
<p>Under IVAs, AOs and PTDs, you agree to repay your debt based on a new repayment plan negotiated by an independent professional called an insolvency practitioner. The plan is approved by the court and your creditors have to stick to it too. The renegotiated repayments are usually made in the form of a single monthly payment or a one-off lump sum. </p>
<p>And during your repayment plan you cannot take out new credit without a written permission from your insolvency practitioner. Bankruptcy proceedings are shown in your <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy/after-you-go-bankrupt/discharge-from-bankruptcy/">credit report for 6 years</a> and new lenders will be able to see that.</p>
<p>A <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/debt-management-plans/">debt management plan</a> is a fourth option for people struggling financially. It is an agreement with creditors to stick to a new repayment plan, negotiated by a licensed debt management company. Unlike the other options, debt management plans are not legally binding, so any or all of your creditors don’t have to agree on a plan and they can chase you for repayments individually. This is known as <a href="https://aib.gov.uk/debt-arrangement-scheme">debt arrangement scheme (DAS)</a> in Scotland.</p>
<figure class="align-center ">
<img alt="Two women with a pad, paper, laptop and mugs at kitchen table." src="https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A little breathing space can give you time to work out a plan for your finances.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/woman-helping-her-same-sex-partner-2048169593">bbernard/Shutterstock</a></span>
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</figure>
<h2>Getting some breathing space</h2>
<p>The UK government launched its <a href="https://www.gov.uk/options-for-dealing-with-your-debts/breathing-space">breathing space</a> scheme in May 2021. And it has clearly been useful for struggling individuals in the midst of the cost of living crisis – registrations <a href="https://www.gov.uk/government/statistics/monthly-insolvency-statistics-july-2023">increased by 28%</a> in the year to July 2023.</p>
<p>It allows you to seek legal protection from pursuit by your creditors for 60 days. During this period, most interest and penalty charges are frozen, enforcement action is halted and your creditors cannot contact you about your debts. But you still need to make your repayments.</p>
<p>A version of the scheme is also offered to individuals who are getting <a href="https://www.gov.uk/government/publications/debt-respite-scheme-breathing-space-guidance/debt-respite-scheme-breathing-space-guidance-for-creditors#:%7E:text=on%20their%20debts.-,Mental%20health%20crisis%20breathing%20space,-A%20mental%20health">mental health crisis treatment</a>. The protection from creditors is for the length of treatment plus 30 days. </p>
<p>Breathing space is a temporary protection and could be a helpful first step to give you some time to plan your finances, but what about after that? <a href="https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2859">Our research shows</a> bankrupt individuals face difficulties borrowing again after bankruptcy. </p>
<p>If you completely discharge your debt, the impact on your borrowing ability is dramatic and swift but short lived – a year on average. But for debt restructuring, future borrowing limitations can last as long as three years.</p>
<p>That’s why it’s important to carefully consider your options if you can’t manage your debt commitments to make sure you find the best fit for your financial situation.</p><img src="https://counter.theconversation.com/content/213413/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The cost of living crisis is affecting UK households, but there are options to consider if you’re having problems repaying debt such as mortgages and credit cards.Alper Kara, Professor of Banking and Finance, Brunel University LondonAtilla Gumus, Senior Lecturer in Financial Economics, Nottingham Trent UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2129122023-09-06T14:07:42Z2023-09-06T14:07:42ZBirmingham’s bankruptcy is only the tip of the iceberg – local authorities across England are at risk<p>The city of Birmingham has <a href="https://www.theguardian.com/society/2023/sep/05/birmingham-city-council-financial-distress-budget-section-114">issued</a> what is known as a <a href="https://www.publicfinance.co.uk/news/2023/09/birmingham-issues-s114-notice">section 114 notice</a>. This signals that the council is unable to balance its budget, due to lack of financial resources. </p>
<p>That the largest local authority in Europe and the second largest city in the UK should effectively declare itself bankrupt should come as no surprise. More than a decade of austerity in English local government has squeezed local councils to their utter financial limits. </p>
<p><a href="https://www.gov.uk/government/collections/final-local-government-finance-settlement-england-2023-to-2024">Government grants</a> are expected to total £61.7 billion in 2023-24. That represents a £1.9 billion (3.2%) increase in real terms over 2022-23 budget data. </p>
<p>However, this recent reversal in local government funding is not enough to offset the <a href="https://www.instituteforgovernment.org.uk/explainer/local-government-funding-england">decade-long cuts</a> to government funding. In July 2023, the <a href="https://obr.uk/frs/fiscal-risks-and-sustainability-july-2023/">Office for Budget Responsibility</a> flagged local borrowing as “at risk”. And the National Audit Office has predicted that <a href="https://www.nao.org.uk/reports/financial-sustainability-of-local-authorities-visualisation-update/">more is to come</a>. Due to the cost-of-living crisis, the rising need for social care and the continued impact of the pandemic, there is less money and ever greater <a href="https://www.publicfinance.co.uk/news/2023/08/huge-costs-are-stifling-councils-lga-warns?utm_term=&utm_medium=email&utm_source=Adestra">need</a>. </p>
<p>Our <a href="https://theconversation.com/what-happens-when-your-local-council-goes-bankrupt-185539">research</a> shows <a href="https://insol.azureedge.net/cmsstorage/insol/media/document-library/books/when-liquidation-is-not-an-option-a-global-study-on-the-treatment-of-local-public-entities-in-distress.pdf?utm_campaign=1259736_LPEs%20Book&utm_medium=email&utm_source=INSOL%20International&dm_i=4WAM,R00O,4HZCIK,3C0KS,1">how fragile</a> England’s local government funding system is. </p>
<p>Councils do have <a href="https://www.instituteforgovernment.org.uk/explainer/tax-and-devolution">limited revenue-raising powers</a> to finance current expenses. Despite this, local authorities across the country have long relied on their <a href="https://www.publicfinance.co.uk/news/2023/08/councils-face-tough-reserve-position-despite-overall-balances?utm_term=&utm_medium=email&utm_source=Adestra">reserves</a>, selling property assets, <a href="https://www.publicfinance.co.uk/news/2020/07/birmingham-tops-latest-round-council-covid-19-allocations">one-off grants</a>, high-risk <a href="https://www.publicfinance.co.uk/news/2023/09/bcp-auditors-raise-serious-concerns-over-financial-viability?utm_term=&utm_medium=email&utm_source=Adestra">investments</a> and cheap borrowing for “regeneration projects” simply to stay afloat.</p>
<h2>What happens when councils go bankrupt</h2>
<p>Local authorities in England cannot be legally liquidated. Instead, when all other remedies have proven ineffective, the chief financial officer issues a <a href="https://www.legislation.gov.uk/ukpga/1988/41/section/114">section 114 notice</a>. This bars all new expenditure for a period of 21 days, except for those that safeguard vulnerable people and statutory services. </p>
<p>Issuing this notice signals that the council is unable to bring under control its future expenditure. At the end of this prohibition period, leaders must then decide what to do. These measures generally include cuts to services, increases to local taxation and the sale of property and other assets.</p>
<p>If the external auditors agree with the turnaround plan, this is sent to the national government for approval, before being implemented by elected officials of the local authority or by independent commissioners appointed by the government. </p>
<p>When no agreement can be reached, the Department of Levelling Up, Housing and Communities intervenes. In 2021, <a href="https://www.gov.uk/government/news/government-acts-to-tackle-failure-of-croydon-council">Secretary of State Robert Jenrick</a> appointed a panel to take over from councillors in <a href="https://www.theguardian.com/society/2022/nov/22/croydon-council-declares-effective-bankruptcy-for-third-time-in-two-years">Croydon</a>, in order to ensure that the council would meet its “<a href="https://questions-statements.parliament.uk/written-statements/detail/2023-07-20/hcws985">best value duty</a>” as required by the Local Government Act of 1999. </p>
<p>Section 114 notices are the last resort. Until 2018, these were very rare – the last council to have issued one was the London Borough of Hackney in 2000. Since 2018, however, five councils have issued section 114s: <a href="https://www.northantslive.news/news/northamptonshire-news/two-years-after-northamptonshire-county-4209584">Northamptonshire</a>, Croydon (in <a href="https://www.theguardian.com/society/2020/nov/13/how-covid-19-pushed-croydon-over-the-edge-into-bankruptcy">2020</a> and <a href="https://www.theguardian.com/society/2022/nov/22/croydon-council-declares-effective-bankruptcy-for-third-time-in-two-years">2022</a>), <a href="https://www.slough.gov.uk/downloads/file/2040/slough-s114-notice-2-july-2021">Slough</a>, <a href="https://www.thurrock.gov.uk/sites/default/files/assets/documents/section114-notice.pdf">Thurrock</a> and <a href="https://www.publicfinance.co.uk/news/2023/06/woking-issues-section-114-notice">Woking</a>. <a href="https://www.coventry.gov.uk/news/article/4744/letter-to-secretary-of-state-for-levelling-up-housing-and-communities">Coventry</a> has warned it might have to follow suit. </p>
<p>Birmingham officials have cited a <a href="https://www.publicfinance.co.uk/news/2023/06/council-reveals-ps100m-cost-flawed-it-system-adoption">new IT system</a> (£100m) installed in 2022 and hosting the 2022 Commonwealth Games (£184m) as triggers for its current dilemma – costs that in themselves are not sufficient to justify the notice. More problematic is the <a href="https://www.publicfinance.co.uk/news/2023/06/birmingham-drastically-cut-spending-after-uncovering-ps760m-equal-pay-cost">£760 million debt</a> for which the council became liable in July 2023, when the bill of an equal-pay ruling by the UK Supreme Court, <a href="https://www.supremecourt.uk/cases/docs/uksc-2012-0008-judgment.pdf">dating back to 2012</a>, became clear. </p>
<p>In response to this new bill, <a href="https://www.bbc.com/news/articles/cd1wnxp9ny1o">Prime Minister</a> Rishi Sunak ruled out government aid to the city, saying it was “not the government’s job to bail out the council for its financial mismanagement”. However, the governance and accounting issues in Birmingham mirror those experienced by all the English authorities that have declared themselves bankrupt in the last five years.</p>
<h2>A flawed system</h2>
<p>Austerity has seen Birmingham suffer the consequences of debilitating cuts to its government <a href="https://www.birmingham.ac.uk/schools/business/research/research-projects/city-redi/wm-redi/theme-6/insights-into-birmingham-city-councils-revenue-funding-and-spending.aspx">funding</a>. Between 2010/11 and 2019/2020, the city’s total income fell by 17%, leading the council to find savings of £736 million. The need for local services, meanwhile, has spiralled, with the population increasing by 7.5%. </p>
<p>Tensions with council staff, in particular in relation to <a href="https://www.theguardian.com/uk-news/2017/jul/28/birmingham-refuse-collectors-strike-runs-into-second-month">waste collection</a>, led to an extended strike in 2017. Concerns over the council’s financial management subsequently saw the finance chief, Clive Heaphy, resign in 2020. </p>
<p>Yet, in 2021, the Chartered Institute of Public Finance and Accountancy <a href="https://www.birmingham.gov.uk/news/article/893/councils_financial_management_praised_in_new_cipfa_report">reported</a> that the city had made good progress. </p>
<p>Following the recent cases of Thurrock and Woking issuing section 114 notices, the Department for Levelling Up, Housing and Communities decided to launch an inquiry into the effectiveness of financial reporting and audit system in local authorities.</p>
<p>Recently, in May 2023, Birmingham’s council leader, Ian Ward, refused to resign, despite <a href="https://www.bbc.com/news/uk-england-birmingham-65614938">a leaked internal report</a> by the Labour party showing a general dysfunctional climate in the local authority. This led to an independent governance review. </p>
<p>Here too, Birmingham is not alone. It takes years for financial issues to become so serious as to justify the issue of a section 114 notice. Governance problems have been widely reported as the underlying cause for <a href="https://committees.parliament.uk/publications/6777/documents/72117/default/">Croydon</a> issuing, to date, <a href="https://www.instituteforgovernment.org.uk/comment/croydon-council-section-114">three section 114 notices</a>. </p>
<p>Local taxpayers have much to be worried about. Distressed local councils often have to increase local taxation to balance their books. To wit, Croydon’s record 14.99% <a href="https://news.croydon.gov.uk/croydon-sets-2023-24-budget/#:%7E:text=Full%20Council%20has%20approved%20a,expects%20all%20councils%20to%20levy.">increase</a> in council tax rates. </p>
<p>Vulnerable people too bear the brunt of this. Public services are reduced to the most essential ones. Local workers are dismissed through <a href="https://www.localgov.co.uk/Resignation-scheme-begins-in-Birmingham--/57827">voluntary</a> or <a href="https://www.bbc.com/news/uk-england-berkshire-61818756">mandatory</a> redundancy schemes. </p>
<p>And the impact is not limited to the local community. Taxpayers across the country end up contributing towards rescuing local authorities. </p>
<p>In May 2023, the cross-party levelling up, housing and communities parliamentary committee <a href="https://committees.parliament.uk/publications/40145/documents/195720/default/">criticised</a> the government’s competitive funding system. Councils have to bid for access to government funds, in a system which is fragmented and resource intensive. </p>
<p>In prioritising low-priority projects over long-term investment, the government’s <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1052708/Levelling_up_the_UK_white_paper.pdf">levelling-up agenda</a> is failing to comprehensively address the problems facing local authorities. </p>
<p>At least 26 more councils, including <a href="https://www.localgov.co.uk/Stoke-on-Trent-Council-at-risk-of-bankruptcy/57857">Stoke-on-Trent</a>, <a href="https://www.publicfinance.co.uk/news/2023/08/kent-curtail-non-essential-spending?utm_term=&utm_medium=email&utm_source=Adestra">Kent</a> and <a href="https://www.theguardian.com/society/2023/aug/09/yorkshire-council-warns-of-budget-crisis-as-deficit-reaches-47m">Kirklees</a>, are deemed at risk of bankruptcy in the next <a href="https://www.theguardian.com/society/2023/aug/28/at-least-26-english-councils-at-risk-of-bankruptcy-in-next-two-years">two years</a>. Without thorough local finance reform – and a government invested in protecting local government at the service of local people – more could fall. </p>
<p><em>This article was amended on September 7 2023 to correctly state that it discusses England’s local government funding system, and not the UK’s, as was previously stated.</em></p><img src="https://counter.theconversation.com/content/212912/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>More than a decade of austerity in English local government has squeezed councils to their utter financial limits.Yseult Marique, Professor, University of EssexEugenio Vaccari, Senior Lecturer, Royal Holloway University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2029152023-04-21T12:41:15Z2023-04-21T12:41:15ZBoy Scouts of America can now create $2.4 billion fund to pay claims for Scouts who survived abuse – a bankruptcy expert explains what’s next<figure><img src="https://images.theconversation.com/files/518556/original/file-20230330-1211-2pnq14.jpg?ixlib=rb-1.1.0&rect=54%2C46%2C2757%2C1918&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The alleged sexual abuse that led to this settlement occurred from 1944 through 2016. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/boy-scouts-of-america-dressed-in-uniforms-carry-american-news-photo/1159640147">Newsday LLC via Getty Images</a></span></figcaption></figure><p><em>On April 19, 2023, the <a href="https://www.prnewswire.com/news-releases/the-boy-scouts-of-america-bsa-announces-confirmation-of-plan-of-reorganization-and-emergence-from-chapter-11-bankruptcy-to-equitably-compensate-survivors-while-ensuring-scouting-continues-across-the-country-301802086.html">Boy Scouts of America declared that it has exited its bankruptcy</a> case after <a href="https://www.reuters.com/legal/boy-scouts-emerges-chapter-11-bankruptcy-2023-04-19/">clearing one of the last legal hurdles</a> in its way. Some insurance companies and sex abuse claimants objected to the Boy Scouts’ plan to pay claimants, but the 3rd U.S. Circuit Court of Appeals held that the plan can go ahead anyway while the insurers’ appeal is pending. It’s now possible to begin the process of paying at least US$2.45 billion to resolve about 82,000 claims against the Boy Scouts and affiliated entities asserted by people who allege that they were <a href="https://abusedinscouting.com/history-of-abuse/">sexually abused as children</a> over the <a href="https://vaumc.org/blog/2022/07/08/important-positive-news-regarding-the-boy-scouts-and-our-local-churches/">past 80 years</a>.</em> </p>
<p><em>The Boy Scouts operate through the national organization known as the BSA, which includes hundreds of separate but affiliated organizations known as <a href="https://www.scouting.org/about/local-council-locator/">local councils</a>, and faith-based or civic groups called <a href="https://scoutingmagazine.org/2021/04/scouting-faq-chartered-organizations">chartered organizations</a>. Because these troop-sponsoring nonprofit organizations across the country are responsible for ensuring the safety of children in scouting, all of them faced child sexual abuse claims.</em></p>
<p><em>The BSA <a href="https://cases.omniagentsolutions.com/?clientId=3552">filed for bankruptcy in February 2020</a> to halt the <a href="https://apnews.com/article/business-delaware-dover-lawsuits-religion-38c9b9db99c491bec9e1bd31d26ea63d">hundreds of lawsuits that were then pending</a> in state courts. More than two years later, the BSA reached an agreement with many of its insurers, all of the local councils, some of the chartered organizations and <a href="https://www.wsj.com/articles/first-payments-to-sex-abuse-victims-in-boy-scouts-bankruptcy-could-take-18-months-11648077889">roughly 85% of all sex abuse claimants</a> on a plan to pay claims.</em> </p>
<p><em><a href="https://pennstatelaw.psu.edu/faculty/reilly">The Conversation asked Marie T. Reilly</a>, a Penn State law professor who studies bankruptcy cases involving child sex abuse claims against Catholic dioceses, to explain what this means.</em></p>
<h2>What happens next?</h2>
<p>The plan the court approved in the BSA’s bankruptcy case will <a href="https://casedocs.omniagentsolutions.com/cmsvol2/pub_47373/6cfcb7aa-d181-40ec-aad1-5543a02babcd_BSA_Plan_Summary_and_FAQs.pdf">create a settlement trust</a> to process and pay sexual abuse claims.</p>
<p>Two retired judges and a committee made up of lawyers who represent sex abuse claimants will administer the trust, which will be <a href="https://www.bsarestructuring.org/event/district-court-rules-in-favor-of-bsa-upholding-the-order-to-confirm-the-bsas-plan-of-reorganization/">the largest sexual abuse compensation fund</a> ever established in the U.S. It will operate independently of the BSA. </p>
<p>The trust will take over responsibility for all claims against the BSA. All parties that contribute to it will be relieved of their liability.</p>
<h2>Where will the money come from?</h2>
<p>The BSA will contribute to the trust property estimated to be worth $220 million. Local councils will contribute about $515 million in cash, property and money obtained from their insurers. Chartered organizations, including the <a href="https://www.wsj.com/articles/boy-scouts-revises-bankruptcy-plan-to-remove-250-million-mormon-church-settlement-11660589753">Church of Jesus Christ of Latter-day Saints</a> and <a href="https://apnews.com/article/business-religion-delaware-sexual-abuse-by-clergy-dover-287019e3686c8b0005ffe6ee715a4a04">Roman Catholic and Methodist</a> churches, schools and other affiliated institutions, will also contribute and receive a release from liability for claims.</p>
<p>The Church of Jesus Christ of Latter-day Saints, still sometimes called the Mormon Church, used to participate in the Boy Scouts but <a href="https://www.nytimes.com/2018/05/09/us/boy-scouts-mormon-church.html">severed ties to it in 2018</a>. It will contribute <a href="https://www.bsarestructuring.org/event/bsa-marks-progress-with-chartered-organizations-and-announces-new-agreements-for-1-037-billion-in-contributions-to-trust/">$250 million</a>.</p>
<p>Insurance companies that issued policies covering the BSA will contribute about $1.6 billion. The trustee of the settlement trust has the authority to sue the insurance companies that have not agreed to the settlement to try to get more money to pay claims.</p>
<h2>How much money will survivors get and when will payments begin?</h2>
<p>People who have filed sex abuse claims have three options:</p>
<p>1) Accept a $3,500 payment based on the information already submitted about their claim in the bankruptcy case. <a href="https://www.wsj.com/articles/first-payments-to-sex-abuse-victims-in-boy-scouts-bankruptcy-could-take-18-months-11648077889">About 6,700 survivors have already elected</a> this option.</p>
<p>2) Submit additional information and have the trustee determine the amount based on <a href="https://www.bsarestructuring.org/estimated-potential-payment-calculator/">agreed-upon factors</a>, including the severity of the abuse.</p>
<p>3) Sue in state court and have a jury determine the amount.</p>
<p>Payments will not start to flow until the trust determines the payment amount of each claim. If the fund is not big enough to pay every claim in full, the trust will reduce the amount of each claim to reflect the estimated shortfall. </p>
<p>It’s hard to say how long it will take to process the nearly 75,000 claims that have not elected the $3,500 option.</p>
<p>Among other things, the trust will need to hire and onboard staff and to set up secure systems to gather and evaluate personal information from tens of thousands of people.</p>
<p>This is likely to be both expensive and slow.</p>
<h2>How will this settlement affect the Boy Scouts?</h2>
<p>The Boy Scouts face an uncertain future after the bankruptcy case.</p>
<p>The organization’s <a href="https://www.ncacbsa.org/who-pays-for-scouting/">revenue depends on membership dues</a>, contributions from its troop sponsoring organizations, product sales, service fees and donations. And the dues are lower because of a <a href="https://apnews.com/article/only-on-ap-health-coronavirus-pandemic-7afeb2667df0a391de3be67b38495972">sharp decline in membership</a>. The BSA now has a little <a href="https://blog.scoutingmagazine.org/2023/01/05/1-million-and-growing-bsa-membership-is-on-the-rise/">more than 1 million members</a> across the country – about <a href="https://www.nytimes.com/2021/07/01/us/boy-girl-scouts-membership-decrease-covid.html">half as many as in 2019</a>.</p>
<p>Trying to convert some of the Boy Scouts-owned properties into cash to meet the organization’s obligations under the bankruptcy plan is complicated. It may take years to accomplish, dragging out the timeline.</p>
<p>Local councils are already selling property to raise the cash they need to make the contribution to the fund.</p>
<p>For example, a local council in New Jersey is <a href="https://www.poconorecord.com/story/news/environment/2022/12/21/boy-scout-camp-sale-in-poconos-would-go-towards-victims-of-sex-abuse/69734886007/">selling its land in the Pocono Mountains</a> to pay its share of the contribution to the compensation fund. </p>
<p><a href="https://www.wfmz.com/news/area/poconos-coal/monroe-county-group-hoping-to-keep-former-boy-scout-camp-from-being-sold-to-developers/article_ec0bc5be-9135-11ed-bbcb-c7ebc89469f6.html">Local residents are concerned</a> that the pristine land, estimated to be worth $4 million, will end up lost to developers.<br>
The same controversy is unfolding regarding the <a href="https://www.curbed.com/2022/07/boy-scouts-open-space-for-sale.html">sale of local council property in Connecticut</a>.</p>
<p>The <a href="https://www.fs.usda.gov/science-technology/loss-of-open-space">U.S. Forest Service estimates</a> that 6,000 acres (24 square kilometers) of open space are lost every day to other uses. <a href="https://www.scouting.org/outdoor-programs/properties/">Local Boy Scouts councils own</a> a significant portion of open space in the U.S., and much of it may be lost.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/518559/original/file-20230330-17-vzefiw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A lakeside structure in the wilderness with a large rustic building in the background." src="https://images.theconversation.com/files/518559/original/file-20230330-17-vzefiw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/518559/original/file-20230330-17-vzefiw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/518559/original/file-20230330-17-vzefiw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/518559/original/file-20230330-17-vzefiw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/518559/original/file-20230330-17-vzefiw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/518559/original/file-20230330-17-vzefiw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/518559/original/file-20230330-17-vzefiw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Deer Lake Boy Scout Reservation in Killingworth, Conn., is among the many properties nationwide being sold by local councils.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BoyScouts-CampSelloff/02f7fcf4e1234edebf58bc56a493144b/photo?boardId=37be9465fcce45d283d5431cccb20a6a&st=boards&mediaType=audio,photo,video,graphic&sortBy=&dateRange=Anytime&totalCount=331&currentItemNo=4">AP Photo/Pat Eaton-Robb</a></span>
</figcaption>
</figure>
<h2>Are there precedents for this?</h2>
<p><a href="https://elibrary.law.psu.edu/bankruptcy/">Catholic organizations have resolved liability</a> for child sexual abuse in bankruptcy cases with plans that are similar to the BSA’s. But the scale of the Boy Scouts’ case in terms of the number of claims and the size of the settlement trust fund is much larger than any case involving a single diocese, or any other nonprofit organization bankruptcy case.</p><img src="https://counter.theconversation.com/content/202915/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marie T. Reilly does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>This is a green light for creating the largest-ever compensation fund for sex abuse claims.Marie T. Reilly, Professor of Law, Penn StateLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1996352023-02-10T13:58:48Z2023-02-10T13:58:48ZWhat are stock buybacks, which critics are blaming for hastening Bed Bath & Beyond’s bankruptcy? A finance professor explains<figure><img src="https://images.theconversation.com/files/522689/original/file-20230424-1075-lx31id.jpg?ixlib=rb-1.1.0&rect=175%2C18%2C3850%2C2661&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bed Bath & Beyond has spent billions in recent years on share buybacks.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BedBathandBeyond/ea8ce516b7be471c88b518eef7cb9ec2/photo?Query=bed%20bath%20&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=117&currentItemNo=8">AP Photo/Ted Shaffrey</a></span></figcaption></figure><p><em>Bed Bath & Beyond <a href="https://www.marketwatch.com/story/bed-bath-beyond-bankruptcy-heres-what-happens-next-7697ed3d">filed for bankruptcy</a> on April 23, 2023, and <a href="https://wolfstreet.com/2023/04/23/after-wasting-11-6-billion-on-share-buybacks-to-return-value-to-shareholders-lol-bed-bath-beyond-goes-bankrupt-will-liquidate/">some analysts</a> <a href="https://news.yahoo.com/bed-bath-beyond-how-stock-buybacks-undermined-the-company-154202427.html">are blaming</a> the billions of dollars the retailer spent on share buybacks as one of the reasons for its downfall. In total, the company has spent nearly US$12 billion buying back its own stock since 2005, including $1 billion in 2021 alone – cash that could have potentially <a href="https://www.therobinreport.com/the-share-buyback-that-killed-bed-bath-beyond/">helped stave off bankruptcy</a>.</em></p>
<p><em>Bed Bath & Beyond is hardly alone in snapping up its own stock. Companies <a href="https://www.bloomberg.com/news/articles/2022-08-18/all-about-stock-buybacks-a-1-trillion-market-force-quicktake?sref=Hjm5biAW">have been buying back</a> record amounts of their own shares in recent years, which prompted President Joe Biden to <a href="https://www.nytimes.com/2023/02/08/us/politics/biden-state-of-the-union-transcript.html">propose quadrupling the tax on buybacks to 4%</a>.</em> </p>
<p><em>But what are stock buybacks, and why do some people consider them to be a bad thing? The Conversation tapped <a href="https://scholar.google.com/citations?user=VxWst50AAAAJ&hl=en&oi=ao">D. Brian Blank</a>, who studies company financial decision-making at Mississippi State University, to fill us in.</em> </p>
<h2>1. What are stock buybacks?</h2>
<p>Before we can answer that question, first we need to understand the basics of how stock works.</p>
<p>Stock <a href="https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks">represents an ownership interest in a company</a>, such that stockholders have a stake in the business. Companies use stock as one way to <a href="https://hbr.org/1989/11/everything-you-dont-want-to-know-about-raising-capital">raise capital</a> by selling their shares to investors, usually in an <a href="https://theconversation.com/investors-swoon-over-bumbles-ipo-but-what-exactly-is-an-initial-public-offering-155084">initial public offering</a>. </p>
<p>Most stockholders, however, obtain stock by buying it on a secondary market, like the New York Stock Exchange. In this case, <a href="https://thebusinessprofessor.com/en_US/investments-trading-financial-markets/primary-vs-secondary-market-definition">one person chooses to sell their ownership</a> in the company, while another person buys it.</p>
<p>As partial owners, shareholders see the value of their stock rise when the company does well. </p>
<p>One way investors can benefit from holding the stock is that some corporations <a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/dividend">pay dividends</a>, which are payments made directly to shareholders. Another way that stockholders can benefit is by selling the stock for more than they paid for it. Together, this creates a return on investment.</p>
<p>And this brings us to share buybacks – and <a href="https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/how-share-repurchases-boost-earnings-without-improving-returns">why investors like them</a>.</p>
<h2>2. Why do companies buy back their own stock?</h2>
<p>When <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-companies-poised-to-prop-up-eps-with-share-buybacks-in-2023-72955469">companies have extra capital</a>, they might go into the secondary market and buy back stock from investors. This is often referred to as a stock repurchase or <a href="https://hbr.org/2001/04/is-a-share-buyback-right-for-your-company">buyback program</a>. Companies that are older and less focused on rapid growth tend to do them more often. </p>
<p>Companies do this for <a href="https://www.google.com/books/edition/Stock_Buyback_Motivations_and_Consequenc/bclgEAAAQBAJ?hl=en&gbpv=1">a variety of reasons</a>, <a href="https://doi.org/10.1111/j.1745-6622.2000.tb00040.x">such as because</a> they think their shares are undervalued and want to signal optimism to Wall Street, or because they simply want another way to distribute profits to shareholders – <a href="https://corpgov.law.harvard.edu/2018/05/23/why-shareholder-wealth-maximization-despite-other-objectives/">a key goal of any company</a> – <a href="https://doi.org/10.1111/j.1745-6622.2000.tb00040.x">other than through dividends</a>. </p>
<p>Shareholders like buybacks because companies <a href="https://corporatefinanceinstitute.com/resources/accounting/dividend-vs-share-buyback-repurchase/">often pay a premium</a> over market price. And when companies buy their own stock, this removes those shares from the market, which has the effect of lifting share prices as supply goes down, benefiting existing stockholders.</p>
<p>It’s estimated that American companies <a href="https://www.bloomberg.com/news/articles/2023-01-09/corporate-america-is-still-lining-up-to-buy-back-its-own-stock-shares?sref=Hjm5biAW">bought back a record $1 trillion</a> of their own stock in 2022. And Apple is the <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-companies-poised-to-prop-up-eps-with-share-buybacks-in-2023-72955469#:%7E:text=Apple%20Inc.%20is%20the%20biggest,of%20the%20S%26P%20500%20companies.">biggest user of buybacks</a>, having spent $557 billion over the past decade repurchasing its own shares. </p>
<figure class="align-center ">
<img alt="elderly white man with gray hair stands in front of lectern and appears to speak while gesticulating with his hands" src="https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/509315/original/file-20230209-23-aranpu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">President Joe Biden said companies should ‘do the right thing’ and stop buying back their own shares.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BidenOil/e9009d5ff31a4a7792593c5974d1d79f/photo?Query=biden%20union&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=2242&currentItemNo=1">AP Photo/Patrick Semansky</a></span>
</figcaption>
</figure>
<h2>3. Why do Biden and others dislike buybacks?</h2>
<p>Critics like Biden contend that share buybacks represent short-term thinking that doesn’t actually create any real value. They <a href="https://www.wsj.com/articles/biden-to-urge-quadrupling-new-1-tax-on-stock-buybacks-11675723035">argue instead</a> that companies should use more of their profits to invest in more productive activities like business operations, innovation or employees.</p>
<p>Returning money that a company makes to stockholders does mean <a href="https://www.cfo.com/corporate-finance/2021/02/shareholder-distributions-vs-reinvestment-the-gap-grows/">less capital is available</a> for other investments. In his speech, Biden specifically <a href="https://www.nytimes.com/2023/02/08/us/politics/biden-state-of-the-union-transcript.html">called out “Big Oil” companies</a> for using the <a href="https://www.cnbc.com/2023/02/08/big-oil-rakes-in-record-annual-profit-fueling-calls-for-higher-taxes.html">record profits</a> they’ve earned from high energy prices to buy back their stock rather than investing in new wells to increase supply – and <a href="https://www.washingtontimes.com/news/2023/feb/7/biden-rips-outrageous-big-oil-profits-calls-quadru/">help reduce gas prices</a>. </p>
<p>But the decision whether to invest to increase domestic production is a complicated one. For example, the reason companies aren’t investing in new wells right now is not simply because they are buying back stock. The reason has more to do with how oil companies, and their shareholders, don’t think it is profitable to invest in more supply for a <a href="https://www.npr.org/2021/03/06/973649045/hold-that-drill-why-wall-street-wants-energy-companies-to-pump-less-oil-not-more">whole host of reasons</a>, including the global push for greener energy by both policymakers and consumers, which is bound to reduce demand for fossil fuels in the future.</p>
<p>It’s also worth noting that while share repurchases are becoming <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/j.1745-6622.2000.tb00040.x">increasingly common</a> and controversial, they remain very <a href="https://noahpinion.substack.com/p/stock-buybacks-dont-really-matter">similar to dividends</a>, which don’t prompt the same concerns among politicians. </p>
<h2>4. Would increasing the tax result in fewer buybacks?</h2>
<p>The 1% tax on buybacks is actually brand new. </p>
<p><a href="https://www.mayerbrown.com/en/perspectives-events/publications/2023/01/1-stock-buyback-tax-us-treasury-irs-release-interim-guidance">Congress passed the tax</a> in 2022 as part of the Inflation Reduction Act. It took effect at the beginning of 2023 and only affects buyback programs of $1 million or more. </p>
<p>Usually when an activity is taxed, it happens <a href="https://www.americanexperiment.org/tax-something-you-get-less-of-it-policymakers-have-always-known-that/">less frequently</a>. So, I expect the tax to nudge companies to spend less on buybacks and more elsewhere. While politicians intend more of the money to be used to invest in their productive capacity, companies may simply spend more on <a href="https://www.wsj.com/articles/biden-to-urge-quadrupling-new-1-tax-on-stock-buybacks-11675723035">paying shareholders dividends</a>.</p>
<p>Since the tax is new, it’s hard to evaluate its actual impact. <a href="https://www.kiplinger.com/investing/stocks/why-stock-buybacks-could-accelerate-in-q4">Companies reportedly accelerated</a> their repurchase programs in 2022 to avoid paying the tax.</p>
<p>But early data from 2023 suggests the 1% tax isn’t significantly deterring buybacks. <a href="https://www.bloomberg.com/news/articles/2023-02-02/stock-buybacks-hit-132-billion-as-companies-snub-all-warnings?sref=Hjm5biAW">Companies announced $132 billion</a> in buybacks in January, three times as much as a year earlier and the most for the month on record.</p>
<p>Biden’s <a href="https://www.reuters.com/world/us/biden-address-bring-buybacks-billionaire-tax-investor-focus-2023-02-07/">proposal to boost</a> the tax to 4% may alter corporate behavior more. But again, it may just lead to greater dividend payments, not the other types of investments he and others hope for.</p>
<p>In addition, given that Republicans control the House, and Democrats have only a narrow majority in the Senate, this proposal <a href="https://www.cnbc.com/2023/02/07/biden-buyback-tax-isnt-working-in-state-of-the-union-he-wants-more.html">has little chance</a> of becoming law anytime soon.</p>
<p>The reasons why large corporations make the decisions they do about where to allocate capital – whether to build a factory, hire more workers or buy back stock – are complicated and, in my view, never taken lightly. These decisions have many <a href="https://www.google.com/books/edition/Stock_Buyback_Motivations_and_Consequenc/bclgEAAAQBAJ?hl=en&gbpv=1">facets and implications</a>, and are not necessarily bad. I believe this is something worth remembering the next time you hear <a href="https://www.barrons.com/articles/corporate-stock-buyback-tax-51675805358">politicians</a> <a href="https://ca.finance.yahoo.com/news/president-biden-calls-out-stock-buybacks-in-state-of-the-union-address-104810205.html">saying</a> “<a href="https://www.cnn.com/interactive/2023/02/annotated-fact-checked-president-biden-sotu/">corporations should do the right thing</a>.”</p>
<p><em>This is an updated version of an article originally published on Feb. 10, 2023.</em></p><img src="https://counter.theconversation.com/content/199635/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>D. Brian Blank does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The retailer has spent nearly $12 billion buying back its own stock since 2005, money that could have been used to invest in its business.D. Brian Blank, Assistant Professor of Finance, Mississippi State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1982442023-01-20T15:27:30Z2023-01-20T15:27:30ZFootball club collapses in lower leagues: how to avoid them for the good of the community<p>The <a href="https://www.echo-news.co.uk/sport/23112841.southend-uniteds-winding-petition-adjourned/">future of Southend United</a> Football Club hangs in the balance. A petition by His Majesty’s Revenue and Customs (HMRC) to have the club wound up over unpaid tax liabilities has just been adjourned by the high court until March. The court had previously granted one stay of execution from November to January, but agreed another after being persuaded by lawyers for the fifth-tier club that it may yet clear its debts.</p>
<p>It comes shortly after <a href="https://thelincolnite.co.uk/2023/01/hmrc-serve-scunthorpe-united-with-winding-up-petition/">Scunthorpe United</a>, another club from the same division, received a similar winding-up petition earlier this month. Both clubs are around 120 years old and were in recent times playing football in the Championship, English football’s second tier: Southend in 2007 and Scunthorpe in 2013.</p>
<p>Without a change in fortunes both clubs will go the same way as numerous other clubs that have been liquidated in recent years, such as New Brighton (1983), Aldershot (1992), Bury (2019) and Macclesfield Town (2020). </p>
<p>Behind every collapse is a story of people losing their jobs and investors losing money, but the community uniquely suffers too. It often has to endure a lengthy period of uncertainty, perhaps taking regular abuse from rival supporters. And when the worst comes to the worst, lots of businesses that rely on the club get hit by the fall out. </p>
<p>Supporters of a collapsed club will often start a new outfit with a similar name at the bottom of the <a href="https://en.wikipedia.org/wiki/English_football_league_system">football league pyramid</a> and start climbing again – Wimbledon, Aldershot and Accrington Stanley are examples. But by then, so much damage has been done that could have been avoided. So what can be done to keep clubs like these in business?</p>
<h2>The long failure list</h2>
<p>Football insolvency is a continual stalking horse for many clubs outside the Premier League. The table below shows just how many have succumbed to some kind of insolvency procedure over the years, with liquidations marked in bold. </p>
<p><strong>English clubs entering insolvency procedures</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Table showing which clubs have entered insolvency procedures" src="https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=316&fit=crop&dpr=1 600w, https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=316&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=316&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=397&fit=crop&dpr=1 754w, https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=397&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/505564/original/file-20230120-12-pbc0yj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=397&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Procedures have included winding-up petitions, administration, receiverships, company voluntary arrangements and liquidation. Liquidations are marked in bold.</span>
<span class="attribution"><span class="source">Author provided</span></span>
</figcaption>
</figure>
<p>Football clubs are different from the average company. They have what can be called an intrinsic viability. Fans will stick with a club through thick and thin, meaning they are very likely to have a reliable revenue stream far into the future. </p>
<p>A football club is a way of life for fans. As well as the current team and fixture list, they take an interest in everything from the club’s history to efforts to bring on youth players to social outreach programmes. For many, the club will be a central nexus point for the area. </p>
<p>Many fans are prepared to dip into their own pockets to facilitate a recovery. For example, when Wigan Athletic was struggling in 2020, supporters responded <a href="https://www.wigantoday.net/sport/football/ps500k-raised-save-wigan-athletic-now-new-target-set-2956938">by raising £500,000</a>. It’s very different to anything most consumers would do for, say, their favourite high-street store.</p>
<p>It therefore makes sense to treat football clubs differently to other businesses when they run into financial trouble. Liquidation is a costly and requires a pointless rebuilding process with a new club that should not be necessary. </p>
<h2>How the law works</h2>
<p>UK insolvency law has <a href="https://www.legislation.gov.uk/ukpga/1986/45/contents">since 1986</a> basically prioritised rescue procedures over liquidation. This was on the back of a government-initiated investigation into this area by insolvency expert <a href="https://en.wikipedia.org/wiki/Report_of_the_Review_Committee_on_Insolvency_Law_and_Practice">Sir Kenneth Cork</a>. The 1982 Cork report said:</p>
<blockquote>
<p>We believe that a concern for the livelihood and wellbeing of those dependent upon an enterprise, which may be the lifeblood of a whole town or even region, is a legitimate factor to which a modern law of insolvency must have regard. The chain reaction consequent upon any given failure can potentially be so disastrous to creditors, employees and the community, that it must not be overlooked.</p>
</blockquote>
<p>The 1986 Insolvency Act duly introduced administration and company voluntary arrangements (CVAs) as ways of rescuing a company as a going concern. If this is the policy in general, it should be used wherever possible in a sport that goes to the heart of local communities. </p>
<p>Football League rules do say that clubs in financial difficulty are supposed to go down one of these two routes. <a href="https://www.companydebt.com/company-rescue-solutions/cva-vs-administration/">With a CVA</a>, the directors stay in control in exchange for reaching a deal with creditors for repaying them. <a href="https://www.realbusinessrescue.co.uk/company-administration/what-are-the-exit-routes-out-of-company-administration#:%7E:text=A%20company%20can%20exit%20company,of%20the%20business%20is%20restored.">With administration</a>, an administrator temporarily takes over to see whether the business can be rescued and how best to repay creditors. Clubs often emerge from such arrangements and get back to business as usual. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="View of the pitch at Scunthorpe United" src="https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/505587/original/file-20230120-14-mzjqzn.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Sorry times at Scunthorpe United.</span>
<span class="attribution"><a class="source" href="https://www.alamy.com/a-southend-united-fan-image350608719.html?imageid=281F759E-5567-4DCB-8EAD-B8E805C6F5A2&p=1262630&pn=1&searchId=17b76fb5c661d92dc82dc95020f52a46&searchtype=0">Wikimedia</a></span>
</figcaption>
</figure>
<p>Yet creditors have to essentially agree to let them go ahead. In football, HMRC is often a club’s largest creditor so it’s often their call. When a club’s tax issues are sufficiently bad, they sometimes decide to go straight for a winding-up petition – which appears to be what has happened at Southend United and Scunthorpe. </p>
<p>HMRC always has to be careful in these situations. Without particularly commenting on these two cases, one can imagine that after several years of being relatively inactive during the pandemic, it might be tempted to make an example of some easy targets. </p>
<p>Equally, a club should be able to avoid getting anywhere near a winding-up petition by engaging with the tax authority early enough. For clubs and creditors alike, it’s vital that they remember that there’s a whole community at stake and act accordingly. </p>
<p>Clubs should also be open to alternatives. One might be some financial involvement from the local authority. For example, Wigan Council in north-west England <a href="https://wiganathletic.com/community/about-the-community-trust">took a stake</a> in Wigan FC after it ran into trouble a couple of years ago. This engagement helps with local community cohesion, particularly with local youngsters and schools.</p>
<p>Another option might be for clubs to become not-for-profit enterprises. <a href="https://www.bigissue.com/news/social-justice/fan-owned-football-clubs-power-supporters-exeter-york/">AFC Wimbledon</a> is a case in point. The supporters’ group use <a href="https://thedonstrust.org/">The Dons Trust</a> to maintain 75% ownership of the club. This is an industrial and provident society which trades for the benefit of the broader community. </p>
<p>Outside the top divisions, such structures might be more appropriate to protect a club for its community. It’s vital to remember that football clubs are a way of life, not just businesses.</p><img src="https://counter.theconversation.com/content/198244/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Tribe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>More than 70 clubs from the lower leagues have entered into insolvency procedures since Accrington Stanley went under in 1962.John Tribe, Senior Lecturer in Law, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1943232022-11-22T09:59:28Z2022-11-22T09:59:28ZHow Made.com went from a pandemic-era business superstar to a failed company in just 18 months<p>Formed in 2011, Made.com offered affordable high-end furniture online with the ambition to one day <a href="https://www.retail-week.com/home-and-diy/madecom-bids-to-rival-ikea-with-expansion-into-germany-/5076030.article?authent=1">rival Swedish furniture giant Ikea</a>. Fast forward 11 years and the British brand, which excelled during the pandemic and was valued last year at <a href="https://www.ft.com/content/fda46bfa-dd6a-40ac-a277-8089a65c7d80">£775 million</a>, has collapsed. </p>
<p>A last-ditch attempt to rescue the company by a former owner of Made.com was <a href="https://www.bbc.co.uk/news/business-63542386">rejected</a>, showing that even rising stars aren’t immune to the spiralling costs of living and doing business. This comes at a difficult time for the retail industry, with British clothing company <a href="https://www.theguardian.com/business/2022/nov/14/joules-to-appoint-administrators-fashion-retailer-stores">Joules</a> also collapsing recently.</p>
<p>In 2020, Made.com <a href="https://www.bbc.co.uk/news/business-57494549">sales hit £315 million</a>, a 30% increase from the previous year, as COVID-era lockdowns saw people spruce up their surroundings with online purchases. A further 63% sales boost over the first three months of 2021 convinced the company to list its shares on the London Stock Exchange in June 2021. At this time, the idea that the company could fail just 18 months later was inconceivable. So, what went wrong?</p>
<p>By 2022, the <a href="https://www.theguardian.com/business/2022/sep/23/madecom-plans-to-cut-a-third-of-staff-as-it-seeks-buyer-or-investment">supply chain difficulties</a> experienced by many businesses as the global economy rushed to reopen after pandemic-era lockdowns had reportedly left some customers waiting months for their orders. While some cancelled out of frustration, orders also fell as the <a href="https://www.ft.com/content/40137940-0e21-46a1-9102-5958ff99ba40">cost-of-living crisis</a> discouraged people from buying large items like furniture.</p>
<p>This <a href="https://www.ft.com/content/6484d5a1-c13f-4632-b718-3f978a7bd06c">sharp decline in sales</a> left Made.com with a lot of money tied up in unsold stock. With no immediate answer to its problems, the company was forced to stop taking orders and find a buyer. After this tactic failed, it entered administration on November 9.</p>
<h2>What is ‘administration’?</h2>
<p>To protect a troubled company from further decline, it can appoint administrators to place the company into administration. This is a corporate procedure that differs from bankruptcy which, in the UK, applies only to individuals. Once a company is placed into administration, the next steps will be to find a way to rescue it from total collapse.</p>
<p>In practice, it is often only aspects of the business that are rescued in this kind of situation. In Made.com’s case, UK retailer <a href="https://www.telegraph.co.uk/business/2022/11/09/next-buys-madecom-administration/">Next</a> has bought the furniture company’s intellectual property (its furniture designs), domain names and brand name for £3.4 million. </p>
<p>Other assets such as its warehouse inventory, which includes sofas, sideboards, beds and soft furnishings, will be sold to <a href="https://www.bbc.co.uk/news/uk-england-nottinghamshire-63637161">other buyers</a> to raise cash to pay back the company creditors. While asset rich, the business model of Made.com came unstuck as <a href="https://theconversation.com/five-problems-that-could-slow-supplies-of-food-computers-cars-and-other-goods-this-winter-189331">supply chains became less reliable</a> in recent years, which meant it simply could not deliver to customers in a timely manner.</p>
<figure class="align-center ">
<img alt="Screenshot of the Made.com website homepage taken on November 9 2022 that says: Goodbye from MADE and thank you." src="https://images.theconversation.com/files/495668/original/file-20221116-2576-us26yv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/495668/original/file-20221116-2576-us26yv.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=276&fit=crop&dpr=1 600w, https://images.theconversation.com/files/495668/original/file-20221116-2576-us26yv.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=276&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/495668/original/file-20221116-2576-us26yv.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=276&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/495668/original/file-20221116-2576-us26yv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=347&fit=crop&dpr=1 754w, https://images.theconversation.com/files/495668/original/file-20221116-2576-us26yv.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=347&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/495668/original/file-20221116-2576-us26yv.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=347&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A screenshot of the Made.com website homepage on November 9 2022, the day it entered administration.</span>
</figcaption>
</figure>
<p>Unfortunately, even this rescue could result in hundreds of job losses and bring uncertainty to Made.com suppliers in the UK and abroad. And for customers, around <a href="https://www.theguardian.com/business/2022/nov/09/madecom-enters-administration-putting-about-500-jobs-at-risk">12,000 UK orders</a> are thought to be outstanding with no refunds offered. It may be possible for customers to rely on <a href="https://www.which.co.uk/consumer-rights/regulation/section-75-of-the-consumer-credit-act-aZCUb9i8Kwfa">section 75</a> of the Consumer Credit Act 1974 and make a claim against their credit provider, if they bought an item for more than £100 on a credit card which hasn’t arrived before <a href="https://www.bbc.co.uk/news/business-63641830">November 25</a>.</p>
<h2>When rescue isn’t an option</h2>
<p>There are a number of ways other than administration in which a company can be rescued from failure – but some options will only work in certain circumstances. For example, a firm could enter into a <a href="https://www.gov.uk/company-voluntary-arrangements">company voluntary arrangement</a> with its creditors, but this means it still has to pay creditors (albeit a reduced amount) if they agree to the proposal. Alternatively, management could propose a <a href="https://www.thegazette.co.uk/insolvency/content/103936">restructuring plan</a>, but the company must be able to continue operating as well as being able to afford what is a costly process.</p>
<p>Even when a rescue is possible, it could significantly change a company – for example, downsizing the business, cutting staff or implementing a more limited business model. Rescues also tend to rely on securing additional finance (Made.com <a href="https://www.telegraph.co.uk/business/2022/10/26/madecom-comes-apart-seams-inflation-drives-sofa-retailer-brink/">failed to obtain</a> such funding) and in some cases the approval of certain creditors. </p>
<p>While an offer to rescue Made.com was made by the former owner, the proposal was likely declined by creditors hoping that a better result existed elsewhere. Unfortunately, this did not lead to the rescue of the company but instead its break-up.</p>
<figure class="align-center ">
<img alt="Person holding cellphone with website of British e-commerce company Made.com Group plc on screen with logo." src="https://images.theconversation.com/files/496214/original/file-20221118-16-6lhrnf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/496214/original/file-20221118-16-6lhrnf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/496214/original/file-20221118-16-6lhrnf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/496214/original/file-20221118-16-6lhrnf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/496214/original/file-20221118-16-6lhrnf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/496214/original/file-20221118-16-6lhrnf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/496214/original/file-20221118-16-6lhrnf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Made.com’s homepage before it went into administration.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/stuttgart-germany-07232022-person-holding-cellphone-2184591445">T. Schneider / Shutterstock</a></span>
</figcaption>
</figure>
<p>Efforts to address corporate failure during COVID-19 resulted in the <a href="https://www.legislation.gov.uk/ukpga/2020/12/contents/enacted">Corporate Insolvency and Governance Act 2020</a>. This provided new measures to assist rescue strategies, such as a standalone moratorium that temporarily stops creditor action against the company so it can devise a plan to survive. And as well as the new restructuring mechanism mentioned above, the act also prevents “<a href="https://www.bdo.co.uk/en-gb/insights/advisory/business-restructuring/the-prohibition-of-ipso-facto-clauses-what-suppliers-and-insurers-need-to-know">ipso facto</a>” clauses that suppliers were previously able to use to terminate contracts upon insolvency.</p>
<p>Despite some positive <a href="https://www.gov.uk/government/publications/corporate-insolvency-and-governance-act-2020-interim-report-march-2022/corporate-insolvency-and-governance-act-2020-interim-report-march-2022">findings</a>, however, these measures all remain relatively untested. This is mostly because of other initiatives the UK government introduced to ease the impact of the pandemic, such as <a href="https://www.gov.uk/guidance/apply-for-a-coronavirus-bounce-back-loan">bounce back loans</a> and the <a href="https://www.gov.uk/government/collections/coronavirus-job-retention-scheme">furlough scheme</a>. </p>
<p>The act’s measures, specifically the moratorium and the restructuring plan, are also subject to certain criteria. If rescue is not viable then the chosen procedure would not be approved by either the insolvency practitioner (with the moratorium) or the courts (with a restructuring plan).</p>
<h2>Retail and the rising cost of living</h2>
<p>These new government measures could be particularly important in the months to come. Made.com is not alone in struggling following the end of lockdown restrictions and the emergence of the cost-of-living crisis. </p>
<p>Online retail sales peaked during the height of the pandemic and have been on a <a href="https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/may2022">downward trend</a> since. Online retailers <a href="https://www.telegraph.co.uk/business/2022/10/19/asos-launches-survival-plan-swings-32m-loss/">Asos</a> and <a href="https://www.theguardian.com/business/2022/sep/28/boohoo-issues-profit-and-sales-warning-as-market-value-slumps-87-in-year">Boohoo</a> have also experienced sharp falls in their share prices this year. Even high-street stalwarts like <a href="https://www.theguardian.com/business/2022/nov/09/m-and-s-faces-gathering-storm-as-joint-venture-with-ocado-makes-loss-marks-and-spencer">Marks & Spencer</a> are seeing the effects of the rising costs on their profits. </p>
<p>While not all companies will meet the same fate as Made.com, these tough trading conditions caused by the cost-of-living crisis are, according to the <a href="https://www.bankofengland.co.uk/monetary-policy-report/2022/august-2022">Bank of England</a>, likely to continue for UK retailers until mid-2023 at the earliest.</p><img src="https://counter.theconversation.com/content/194323/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Wood does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Supply chain difficulties and rising costs have forced Made.com into administrationJohn Wood, Lecturer in Law, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1939682022-11-09T16:24:18Z2022-11-09T16:24:18ZRising unemployment: economists sometimes say it’s good for the economy, but are they right?<figure><img src="https://images.theconversation.com/files/493844/original/file-20221107-21-9drabs.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">'What'll I tell my wife and kids?'</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/unemployed-people-walking-streets-concept-sadness-673992322">guitarfoto</a></span></figcaption></figure><p>Signs of a global economic downturn are growing by the day. <a href="https://www.oecd.org/newsroom/consumer-prices-oecd-updated-4-october-2022.htm">Inflation is</a> still going up, <a href="https://theconversation.com/the-whole-world-is-facing-a-debt-crisis-but-richer-countries-can-afford-to-stop-it-192119">debt is up</a> and <a href="https://www.politico.eu/article/ecb-christine-lagarde-doubling-down-with-another-giant-rate-hike-despite-political-pressure/">interest rates are up</a>, which means that <a href="https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022">projections for growth</a> are down. Put simply, the proverbial something is close to hitting the fan.</p>
<p>Business closures and job losses are likely to become another hurdle for the global economy – and that points to rising unemployment. Yet, while most people would think of rising unemployment as a bad thing, some economists don’t entirely agree. </p>
<p>Economists have <a href="https://www.forbes.com/sites/forbesfinancecouncil/2021/05/25/how-unemployment-can-spur-people-to-open-new-businesses/?sh=6d853393573e">long pointed to</a> a counterintuitive positive relationship between unemployment and entrepreneurship, born of the fact that people who lose their job often start businesses. This is often referred to within economic literature as necessity-based or push-factor entrepreneurship.</p>
<h2>Where it gets tricky</h2>
<p>There is certainly good evidence for the existence of this contradictory relationship. The graph below shows the rates of UK business creation in blue and unemployment in red. As you can see, unemployment started to increase during the global financial crisis of 2007-09 and business creation followed not long after. </p>
<p><strong>UK new business creation and unemployment, 2006-2020</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/493852/original/file-20221107-25-r3bz19.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph plotting unemployment and new business creation rates in the UK" src="https://images.theconversation.com/files/493852/original/file-20221107-25-r3bz19.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/493852/original/file-20221107-25-r3bz19.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=315&fit=crop&dpr=1 600w, https://images.theconversation.com/files/493852/original/file-20221107-25-r3bz19.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=315&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/493852/original/file-20221107-25-r3bz19.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=315&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/493852/original/file-20221107-25-r3bz19.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=396&fit=crop&dpr=1 754w, https://images.theconversation.com/files/493852/original/file-20221107-25-r3bz19.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=396&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/493852/original/file-20221107-25-r3bz19.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=396&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>This relationship between business creation and unemployment has previously been used by some as a justification for cold social policies towards the unemployed on the rationale that “the market fixes itself” in the long run. They see business closures and job losses not as human miseries that require government help, but necessary evils that are needed to reallocate the money, people and other resources back into the economy in more efficient ways . </p>
<p>But <a href="https://www.tandfonline.com/doi/full/10.1080/21681376.2022.2118072">my latest research</a> has found that rising unemployment is not quite the silver bullet for reigniting the economic engine that it’s cracked up to be. I looked at 148 regions across Europe from 2008 to 2017. Although I did find evidence that unemployment can stimulate business creation over time, this only seems to happen in higher performing regions within higher performing economies such as the Netherlands, Finland and Austria.</p>
<p>In lower performing regions within lower performing economies such as Bulgaria, Romania and Hungary, the relationship between unemployment and business creation actually appears to be negative. In other words, rather than inducing business creation, unemployment simply seems to lead to more unemployment. </p>
<p>The reason why higher performing regions in wealthier areas have a positive relationship between job losses and business creation is that they enjoy what are known as “urbanisation economies”. These are positive benefits derived from the scale and density of economic activity occurring within that area, including wider arrays of services, greater pools of customers and greater numbers of transactions relative to other areas of the economy.</p>
<p>For example, a firm located in a capital city like London will benefit from more abundant access to consumers, suppliers and lenders as well as larger labour pools. The higher population density in these areas also makes it more likely that firms and workers will learn faster as they observe the activities of their many neighbours. In more peripheral areas with fewer of these characteristics, the opposite is true. This is why unemployment affects different places differently. </p>
<h2>What it means</h2>
<p>One consequence is that economists need to stop explaining how economies perform differently based solely on national factors. And it’s not just unemployment where this becomes apparent. For example, Ireland’s longstanding low rate of <a href="https://taxfoundation.org/corporate-tax-rates-europe-2022/">corporation tax (12.5%)</a> has been cited as a reason for its high foreign direct investment, which accounts for <a href="https://enterprise.gov.ie/en/what-we-do/trade-investment/foreign-direct-investment-fdi-/">roughly 20%</a> of private sector employment. </p>
<p>Yet while <a href="https://www.cso.ie/en/releasesandpublications/ep/p-bd/businessdemography2020/keyfindings/">just over 43%</a> of all Irish enterprises in 2020 were located in either Dublin or Cork, counties like Leitrim in the north accounted for fewer than 1% of enterprises. So while national measures can help induce entrepreneurship and increase the overall size of the pie, the pie is shared very unequally. Just as rising unemployment can benefit some areas while hindering others, the same is true of government interventions. </p>
<p>We therefore need to stop viewing the free market and government intervention as either wrong or right. In some contexts one is going to be more helpful, while in other contexts it will be the opposite. Recognising this reality would improve on much of the polarised debate in politics and economics, in which those on the right can come across as cold and ignorant, while those on the left can seem self-righteous and sanctimonious, viewing capitalism and markets as dirty words. </p>
<p>How does this apply to today’s gathering downturn? It would make sense for governments to prioritise supporting businesses in more peripheral regions, while leaving those in wealthier urban areas to fend for themselves.</p>
<p>The famous economist <a href="https://www.ft.com/content/ece567f4-83c1-11e9-b592-5fe435b57a3b">John Kenneth Galbraith gave</a> what I believe to be one of the best pieces of commentary on this topic, saying:</p>
<blockquote>
<p>Where the market works, I’m for that. Where government is necessary, I’m for that … I’m in favour of whatever works in the particular case.</p>
</blockquote>
<p>If we are to survive this upcoming recession and get things going again, we are going to need to acknowledge that centralised “one-size-fits-all” policies won’t be useful everywhere. The solutions to economic recovery are in some cases government intervention and in others the free market, but not always one or the other.</p><img src="https://counter.theconversation.com/content/193968/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daragh O'Leary does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A new pan-European research project shows that it’s correct in some areas but completely wrong in others.Daragh O'Leary, PhD Researcher in Economics, University College CorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1939212022-11-04T12:35:22Z2022-11-04T12:35:22ZHow winning record $2 billion Powerball jackpot could still lead to bankruptcy<figure><img src="https://images.theconversation.com/files/493380/original/file-20221103-13-rtnw5b.jpg?ixlib=rb-1.1.0&rect=98%2C134%2C8080%2C5309&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Got the winning ticket? </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/PowerballJackpot/472c058979164ec0823b9328b236fcb6/photo?Query=powerball&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1087&currentItemNo=1">AP Photo/Julio Cortez</a></span></figcaption></figure><p>Someone in Altadena, California, was the <a href="https://www.cnn.com/2022/11/08/us/powerball-lottery-record-delayed-drawing-tuesday-trnd/index.html">lucky winner of the largest Powerball jackpot</a> in history – or perhaps the unlucky winner? </p>
<p>Officials <a href="https://www.powerball.com/article/ticket-california-wins-world-record-204-billion-powerball-jackpot">revealed that the winning ticket</a> was purchased on Nov. 8, 2022, after the <a href="http://www.powerball.com/games/home">Powerball jackpot</a> swelled to <a href="https://www.cnn.com/2022/11/08/us/powerball-lottery-record-delayed-drawing-tuesday-trnd/index.html">US$2.04 billion</a>.</p>
<p>The prize was the largest lottery the world has ever seen, <a href="https://www.today.com/money/1-6-billion-powerball-california-couple-claims-winning-ticket-6-t100966">overtaking a $1.6 billion Powerball jackpot</a> in 2016 and <a href="https://www.cnn.com/2018/10/24/us/mega-millions-drawing-wednesday/index.html">$1.54 billion Mega Millions in 2018</a>.</p>
<p>The <a href="http://powerball.com/#powerball-prizes-and-odds">odds of winning</a> the Powerball lottery are very small, <a href="https://www.cbsnews.com/news/powerball-jackpot-record-amount-19-billion-odds-of-winning/">about 1 in 292 million</a>. You are about <a href="https://www.cdc.gov/disasters/lightning/victimdata.html">300 times more likely to be hit by lightning</a>. If <a href="https://www.census.gov/quickfacts/fact/table/US/PST045217">every adult</a> in the U.S. purchased just one ticket, each with a different number, there would still be a good chance – about 11% – that no winner would emerge at a given drawing and the pot would continue to grow even larger.</p>
<p>But once a lottery winner is declared and claims the prize, a more interesting question arises: What happens to all that money and the supposedly lucky ticket holder? As <a href="http://doi.org/10.1007/s10834-012-9299-y">research by me</a> and others shows, it’s often not what you’d expect. </p>
<figure class="align-center ">
<img alt="a bolt of lightning can be seen on the horizon in the clouds above the sea" src="https://images.theconversation.com/files/493384/original/file-20221103-15-f050yg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/493384/original/file-20221103-15-f050yg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/493384/original/file-20221103-15-f050yg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/493384/original/file-20221103-15-f050yg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/493384/original/file-20221103-15-f050yg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/493384/original/file-20221103-15-f050yg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/493384/original/file-20221103-15-f050yg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">You’re 400 times more likely to be hit by a bolt of lightning than to win the Powerball.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/thunderstorm-over-sea-royalty-free-image/608978427?phrase=lightning">Jerry Kestel/EyeEm via Getty Images</a></span>
</figcaption>
</figure>
<h2>A smaller prize than it seems</h2>
<p>The first thing to bear in mind is that even when the jackpot is eye-wateringly large, the actual payout will be much less. </p>
<p>If someone comes forward with the winning ticket, they will not actually receive $2 billion in one big check. As a single winner, they can either choose a lump sum payment that amounts to about $929 million or receive $2 billion worth of annual payments that get progressively higher over <a href="http://www.megamillions.com/difference-between-cash-value-and-annuity">30 years</a>.</p>
<p>Also, the taxman gets to take a big bite. The federal government <a href="https://www.usamega.com/powerball/jackpot">will take</a> about $344 million, leaving $585 million if it’s a lump-sum payment. And then the state in which the winner resides will swallow a smaller portion if it has an income tax, as California does.</p>
<p>That jackpot is starting to look a lot smaller, though it’s still a massive chunk of change. </p>
<h2>Where windfalls go</h2>
<p>The conventional wisdom is that winning the lottery will change your life. While that’s probably always true, research suggests that it’s not always going to change in the way you might hope. </p>
<p>Economists Guido Imbens and Bruce Sacerdote and statistician Donald Rubin <a href="https://doi.org/10.1257/aer.91.4.778">showed in a 2001 paper</a> that people tend to spend unexpected windfalls. A look at lottery winners approximately 10 years after they won found they saved just 16 cents of every dollar won. </p>
<p>In my own research, I found that average people in their 20s, 30s or 40s who were <a href="http://doi.org/10.1007/s10834-012-9299-y">given an inheritance or large financial gift</a> quickly lost half the money through spending or poor investments. </p>
<p>And other studies <a href="http://doi.org/10.1162/REST_a_00114">have found</a> that winning the lottery generally didn’t help financially distressed people escape their troubles and instead only postponed the inevitable bankruptcy. <a href="https://www.cnbc.com/2018/02/06/why-the-560-million-powerball-winner-wants-to-stay-unknown.html">One found</a> that one-third of lottery winners eventually go bankrupt. </p>
<h2>It’s not easy to blow it all</h2>
<p>So how exactly could a lottery winner blow through hundreds of millions of dollars so quickly? It’s not easy. </p>
<p>Demographic research on lottery players’ characteristics shows that <a href="http://link.springer.com/article/10.1007/s10899-010-9228-7">lottery playing peaks</a> when people are in their 30s and falls as people get older. And the average female in the U.S. <a href="https://www.cdc.gov/nchs/data/vsrr/VSRR10-508.pdf">lives to age 80.5 and the average male to 75.1</a>.</p>
<p>So that means if the winner is in her 30s, she would have about 45 years or so to spend the lump after-tax sum of, let’s say, $470 million. That means she would have to spend a bit over $10 million a year, or roughly $29,000 per day, to burn through it all – even more when you factor in interest accrued while it sits in the bank.</p>
<p>In addition, really blowing it all means the winner has no assets to show for it. If she uses the money to buy luxury homes, <a href="https://www.vulture.com/2018/10/banksy-says-that-painting-was-meant-to-be-totally-shredded.html">Banksy paintings</a> and Ferraris and Aston Martins, her net worth wouldn’t actually change and she’d be able to retire with her wealth intact – assuming the investments kept their value or rose. </p>
<p>Blowing through the money, which leads to bankruptcy and low savings rates, means the winner has nothing to show for her spending besides a good time, plus goodwill from friends and relatives who went along for the ride.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/493393/original/file-20221103-26-1gh4il.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Two white men in suits, ties and coats stand next to each other in New York in front of a tall building. One of them is pointing and looking up" src="https://images.theconversation.com/files/493393/original/file-20221103-26-1gh4il.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/493393/original/file-20221103-26-1gh4il.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=888&fit=crop&dpr=1 600w, https://images.theconversation.com/files/493393/original/file-20221103-26-1gh4il.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=888&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/493393/original/file-20221103-26-1gh4il.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=888&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/493393/original/file-20221103-26-1gh4il.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1115&fit=crop&dpr=1 754w, https://images.theconversation.com/files/493393/original/file-20221103-26-1gh4il.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1115&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/493393/original/file-20221103-26-1gh4il.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1115&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Huntington Hartford, at left, next to Robert Moses, was born rich but died in bankruptcy.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/RobertMoses/9cfd01d5e7384b53ab10381973ddf653/photo?Query=Huntington%20Hartford&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=14&currentItemNo=12">AP Photo</a></span>
</figcaption>
</figure>
<h2>Riches to rags</h2>
<p>And that’s basically what a man named Huntington Hartford did. </p>
<p>Hartford, who lived from 1911 to 2008, was the heir to <a href="https://www.groceteria.com/store/national-chains/ap/ap-history/">the Great Atlantic & Pacific Tea Co.</a> fortune. This company, which started just before the Civil War, is better known as the A&P supermarket chain. A&P was the first U.S. coast-to-coast food store, and from World War I to the 1960s, it was what <a href="https://www.walmart.com/">Walmart</a> is for today’s American shoppers. </p>
<p>Hartford inherited <a href="https://www.telegraph.co.uk/news/obituaries/1996555/Huntington-Hartford.html">approximately $90 million</a> when he was 12. <a href="http://businessmacroeconomics.com/">Adjusting for inflation</a> means he was given <a href="https://www.bls.gov/data/inflation_calculator.htm">about $1.6 billion</a> as a child, after taxes. Yet Huntington <a href="https://www.nytimes.com/2008/05/20/arts/design/20hartford.html">declared bankruptcy</a> in New York in 1992, approximately 70 years after being handed one of the largest fortunes in the world.</p>
<p>Hartford had the reverse Midas touch. He lost millions buying real estate, creating an art museum and sponsoring theaters and shows. He combined poor business skills with an exceptionally lavish lifestyle. After declaring bankruptcy, he lived as a recluse with a daughter in the Bahamas until he died. </p>
<h2>May the odds be ever in your favor</h2>
<p>Hartford’s life story, coupled with academic research, shows that coming into a windfall of cash doesn’t always have a happy ending. Squandering that money is easier than it seems. </p>
<p>If you like to pay the lottery, I wish you good luck. If you win, I wish you even more luck.</p>
<p>Nevertheless, one key lesson, whether you play or not, is that when you get a windfall or win the lottery, plan ahead and resist the all-too-human temptation to spend all the money.</p>
<p><em>This article was updated on Nov. 10, 2022, to reference the winner.</em></p><img src="https://counter.theconversation.com/content/193921/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Squandering all that money is easier than it seems.Jay L. Zagorsky, Clinical associate professor, Boston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1843942022-06-27T14:02:24Z2022-06-27T14:02:24ZKenya and South Africa offer insights into digital economy challenges and alternatives<figure><img src="https://images.theconversation.com/files/468006/original/file-20220609-18-wecu74.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Telemarketers at an international outsourcing call centre in Nairobi. </span> <span class="attribution"><span class="source">Tony Karumba/AFP via Getty Images</span></span></figcaption></figure><p>The World Bank is warning of <a href="https://www.bbc.com/news/business-59946302">the real danger</a> of a massive economic downturn across the world. In a <a href="https://www.worldbank.org/en/news/press-release/2022/04/13/sub-saharan-african-growth-slows-amid-ongoing-and-new-economic-shocks#:%7E:text=The%20World%20Bank's%20latest%20Africa's,supply%20disruptions%20and%20climate%20shocks">recent analysis</a> it warned that many countries – including those in sub-Saharan Africa – will be facing economic challenges due to rising food and fuel prices. </p>
<p>At the same time, however, there is unshakeable optimism around the growth potential of African economies as a whole and specifically <a href="https://www.dw.com/en/analysts-forecast-grim-2022-economic-outlook-for-africa/a-60405289%23:%7E:text=Various%20threats%20face%20African%20economies,%22Global%20Economic%20Prospects%22%20report">the digital economy</a>. The <a href="https://institute.global/policy/supercharging-africas-startups-continents-path-tech-excellence">rapid rise of tech hubs and startups</a> in urban areas in sub-Saharan Africa in recent years seems to support that.</p>
<p>Many observers have, therefore, identified the digital economy as an <a href="https://www.dw.com/en/analysts-forecast-grim-2022-economic-outlook-for-africa/a-60405289#:%7E:text=Various%20threats%20face%20African%20economies,%22Global%20Economic%20Prospects%22%20report">important driver of long-term growth in Africa</a> despite current global challenges.</p>
<p>The reality is that experiences with promoting the digital economy in sub-Saharan Africa have been mixed. Following great hopes in the promise of “digital connectivity” in the early 2000s, <a href="https://eprints.whiterose.ac.uk/117030/10/Digital%20Control%20in%20Value%20Chains%20Challenges%20of%20Connectivity%20for%20East%20African%20Firms.pdf">many scholars have observed</a> that the ability of African businesses to turn connectivity into success in global markets has been limited. </p>
<p>The future of Africa’s tech scene is equally uncertain. Despite great potential, the <a href="https://institute.global/policy/supercharging-africas-startups-continents-path-tech-excellence">tech startup scene is underfunded</a>, and several tech hubs <a href="https://www.theafricareport.com/23434/tech-hubs-across-africa-to-incubate-the-next-generation/">have had to shut down due to bankruptcy</a>.</p>
<p>How can we explain this gap between promise and reality with digital economy investments in sub-Saharan Africa? And how can investments lead to more sustainable growth? </p>
<p>In my recent <a href="https://www.sciencedirect.com/science/article/pii/S0048733322000609?via%3Dihub">study</a> I analysed the historical case of global business services in Kenya and South Africa to examine why governments and businesses make certain investment choices over time, and how they can learn to be more in tune with the context of sub-Saharan Africa.</p>
<p>The main finding is that global templates of success, such as meeting global standards and developing scalable business models, often stand in the way of realising the full potential of locally specific skills and business opportunities. As I show below, this has fundamental implications for today’s digital startup scene in sub-Saharan Africa. </p>
<h2>Flawed hopes</h2>
<p>The promise of the digital economy has always been a double-edged sword. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2855398">Many global consulting firms and international organisations</a> initially saw “digital connectivity” as a key driver for the future growth of African economies. Even today there is a strong belief that you just need to have <a href="https://www.theafricareport.com/23434/tech-hubs-across-africa-to-incubate-the-next-generation/">the right infrastructure in place</a> for the digital economy to grow and create jobs. </p>
<p>This optimism led the Kenyan government in 2007 to <a href="https://academicjournals.org/article/article1380730555_Iraki.pdf">define business process outsourcing as a central pillar in its Vision 2030</a>. The assumption was that Kenya had the talent and internet connectivity to copy India’s success in this business. In a similar fashion, South Africa’s business leaders put their hopes in call centres, which had previously generated many jobs in India and the Philippines.</p>
<p>But these hopes turned out to be flawed. Digital businesses are often easy to get into but difficult to compete in – <a href="https://www.academia.edu/1754295/New_Silicon_Valleys_or_a_New_Species_Commoditization_of_Knowledge_Work_and_the_Rise_of_Knowledge_Services_Clusters">especially on the global stage</a>. To win client contracts in a highly standardised digital business, such as call centres and tech support, you need to be scalable. Yet, to succeed with scale you also need to be cost competitive and develop a strong reputation. </p>
<p>Kenyan business process outsourcing services were neither scalable nor competitive. As a result they soon <a href="https://nation.africa/kenya/business/business-park-opens-doors-to-other-firms-as-bpos-fail-to-lift--816184">went out of business</a>. A famous example was <a href="https://www.businessdailyafrica.com/bd/corporate/companies/jobs-on-the-line-as-creditor-makes-last-call-for-kencall--2073802">KenCall</a>, a once-hyped Kenya-based call centre that could not keep up with global competition. </p>
<p>South African call centres had the scale. But competition from the Philippines put enormous pressure on them. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/for-workers-in-africa-the-digital-economy-isnt-all-its-made-out-to-be-176724">For workers in Africa, the digital economy isn't all it's made out to be</a>
</strong>
</em>
</p>
<hr>
<p>The current tech startup scene seems to be facing similar challenges: <a href="https://institute.global/policy/supercharging-africas-startups-continents-path-tech-excellence">scalability of new ventures has been a serious issue</a>. In part this is due to poor support infrastructure as well as global competition.</p>
<h2>Lessons learnt</h2>
<p>In the case of global business services, Kenya and South Africa learned their lesson. Initially, trying to meet global standards and keep up with global rivals was seen as desirable in the eyes of governments, businesses and the general public. But as competitive pressure grew, <a href="https://www.sciencedirect.com/science/article/pii/S0048733322000609?via%3Dihub">the agenda changed</a> from competing globally to avoiding global competition, from meeting global standards to focusing on locally specific skills and resources.</p>
<p>As a result, both economies invested into niche business segments. For example, Kenyan business process outsourcing providers increasingly focused on local and regional clients <a href="https://www.tandfonline.com/doi/full/10.1080/00220388.2015.1126251">rather than trying to compete for clients from Europe and North America</a>. </p>
<p>In the case of South Africa, business services increasingly <a href="https://www.cio.com/article/220513/the-culture-of-outsourcing-in-africa.html">diversified into more specialised areas</a> such as legal process outsourcing, to lower global competitive pressure. </p>
<p>Also, both economies promoted so-called <a href="https://tunga.io/tech-for-good-will-impact-sourcing-be-the-new-fair-trade/">impact sourcing</a>, which focuses on hiring and training disadvantaged young people from slums and rural areas, combining employment opportunities with community impact. What these niche strategies have in common is that they are less subject to global competition, and that they rely on locally embedded resources, such as local client connections and <a href="https://www.academia.edu/29577219/The_strategic_potential_of_community_based_hybrid_models_The_case_of_global_business_services_in_Africa">untapped labour pools in local communities</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-fourth-industrial-revolution-a-seductive-idea-requiring-critical-engagement-184475">The Fourth Industrial Revolution: a seductive idea requiring critical engagement</a>
</strong>
</em>
</p>
<hr>
<p>Some of these niche models emerged even before they became fashionable. In fact, their ability to survive against the mainstream gave them a competitive edge, allowing them to survive in the long-term.</p>
<p>A similar dynamic might be unfolding with today’s tech startup scene in sub-Saharan Africa. </p>
<h2>Alternative models</h2>
<p>It’s still fashionable today to promote tech startups and tech hubs based on models from the global North. But new, alternative models might be emerging that might be much more sustainable. </p>
<p>For example, studies suggest that African businesses are traditionally much more community-focused. Businesses exist to <a href="https://www.cambridge.org/core/journals/management-and-organization-review/article/africa-business-research-as-a-laboratory-for-theorybuilding-extreme-conditions-new-phenomena-and-alternative-paradigms-of-social-relationships/51886A8394EDC018E758EEC60AFB3153">support communities rather than just to make profit</a>. Research shows that while African tech hubs often “fail” to scale up businesses in the Western sense, they are very effective in providing individual growth opportunities and in <a href="https://www.tandfonline.com/doi/abs/10.1080/02681102.2017.1335282">expanding and deepening community connections</a>. </p>
<p>Such experiences suggest that concepts of “scalability” and “growth” may take on a range of meanings in sub-Saharan Africa, and that the global North should expand their horizon beyond their narrow conception of these terms to really understand Africa’s economic potential.</p>
<h2>Take-aways</h2>
<p>Recent reports may be right that the digital economy carries a lot of potential in helping sub-Saharan Africa overcome current economic challenges towards sustainable growth. But maybe it is not because the digital economy can merely drive economic growth in the conventional sense, but because it can expand regional business networks and local communities, and make them more resilient against global economic threats.</p><img src="https://counter.theconversation.com/content/184394/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephan Manning does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s still fashionable today to promote tech startups and tech hubs based on models from the global north. But new, alternative and more sustainable models might be emerging.Stephan Manning, Professor of Strategy and Innovation, University of Sussex Business School, University of SussexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1762182022-03-04T13:20:33Z2022-03-04T13:20:33ZYour chances of getting rid of student loan debt depend on who you are<figure><img src="https://images.theconversation.com/files/448144/original/file-20220223-25-4urvqy.jpg?ixlib=rb-1.1.0&rect=7%2C0%2C4977%2C3325&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Single mothers are more likely than single fathers to have their debts discharged in court. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/license/522936678?adppopup=true">Heide Benser/Getty Images</a></span></figcaption></figure><p>To get rid of student loan debt through bankruptcy, you must prove to the court that paying back your student loans would cause an “<a href="https://codes.findlaw.com/us/title-11-bankruptcy/11-usc-sect-523.html">undue hardship</a>.” But in our <a href="https://doi.org/10.1037/law0000338">peer-reviewed study of nearly 700 student loan discharge cases spanning 1985 to 2020</a>, we found that judges’ decisions to dismiss student loans are often influenced by personal factors, such as your gender.</p>
<p>To determine whether repaying the student loan debt is causing the debtor to experience an undue hardship, most courts <a href="https://scholar.google.com/scholar_case?case=5270362258430051298&q=brunner+v.+new+york&hl=en&as_sdt=3,43">apply three criteria</a> outlined in a case known as “<a href="https://law.justia.com/cases/federal/appellate-courts/F2/831/395/398433/">Brunner</a>.”</p>
<p>Under Brunner, to prove they are experiencing an undue hardship, debtors must first demonstrate that repaying their student loans would not allow them to maintain a minimal standard of living. In other words, repaying the debt would prevent them from meeting their basic needs, including food, clothing and shelter. Second, debtors must show that additional circumstances exist that indicate their finances are unlikely to improve. These additional circumstances could include having a medical condition or caring for dependents. Third, debtors must show that they have made good-faith efforts to repay their loans. This includes efforts to make payments on the loans or attempts to consolidate their debt.</p>
<p>Meeting these three criteria is tough. Our data shows that about 38% of the debtors in the cases that we studied received a full or partial discharge of their student loans. But we also discovered other factors regularly come into play in the court’s decisions. Here are three factors that stood out in <a href="https://doi.org/10.1037/law0000338">our research</a>.</p>
<h2>1. Being a single mom helps, but not being a single dad</h2>
<p>In student loan discharge decisions, judges <a href="https://sgp.fas.org/crs/misc/R45113.pdf">regularly consider the expenses associated with a debtor’s children</a>. Our research team found it also sometimes matters to the court whether the debtor is a single parent. Being a single parent more than doubled the chances of obtaining a discharge, but only for mothers. Single fathers did not experience any notable benefit from being a single parent.</p>
<figure class="align-center ">
<img alt="A woman seated in a kitchen looks over paperwork while a boy lingers over her shoulder with his arm around her." src="https://images.theconversation.com/files/448126/original/file-20220223-15-tl6e3p.jpg?ixlib=rb-1.1.0&rect=47%2C0%2C7892%2C5304&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/448126/original/file-20220223-15-tl6e3p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/448126/original/file-20220223-15-tl6e3p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/448126/original/file-20220223-15-tl6e3p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/448126/original/file-20220223-15-tl6e3p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/448126/original/file-20220223-15-tl6e3p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/448126/original/file-20220223-15-tl6e3p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Courts are more likely to see the mother as a caregiver than they are a father.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/woman-struggling-with-home-finances-and-debt-while-royalty-free-image/1215795289?adppopup=true">Fertnig/E+ via Getty Images</a></span>
</figcaption>
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<p>We’re not certain about why courts view single moms as more deserving of a discharge than single dads. It could have something to do with stereotypes about mothers being the <a href="https://doi.org/10.1371/journal.pone.0147315">“caregivers” in a family, whereas men are the “breadwinners</a>.” A mother’s plea to help fulfill her role as a caregiver may be seen as more persuasive than a father’s plea to be relieved of his financial obligations.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/can-you-get-rid-of-your-student-loans-by-filing-for-bankruptcy-130995">Can you get rid of your student loans by filing for bankruptcy?</a>
</strong>
</em>
</p>
<hr>
<h2>2. Disclosing a medical condition helps men, but not women</h2>
<p>When assessing a debtor’s ability to repay a debt, <a href="https://casetext.com/case/educ-credit-mgmt-corp-v-jorgensen-in-re-jorgensen">case law suggests</a>
that judges must consider any difficulties a person has in trying to find a decent-paying job. </p>
<p>Such struggles are captured by the “additional circumstances” mentioned in the second Brunner criterion. Those additional circumstances include medical conditions. However, judges appear to give medical conditions more consideration for men than they do for women.</p>
<p>Our research found that men reporting a medical condition are 93% more likely to obtain a student loan discharge than men who did not report a medical condition. We did not find this same effect for women. This gender gap is highly relevant, given that female debtors outnumbered male debtors in our analysis almost 2 to 1.</p>
<p>Women’s medical concerns seem to be dismissed or overlooked in multiple arenas – from courts to <a href="https://doi.org/10.1177/2372732220942894">hospitals</a>. Psychologists theorize this may arise from <a href="https://doi.org/10.1155/2018/6358624">stereotypes</a> that suggest women may dramatize medical conditions and exaggerate their pain. </p>
<h2>3. Not having an attorney hurts your cause</h2>
<p>Thanks to ubiquitous crime dramas, it is widely known that those who cannot afford an attorney <a href="https://www.law.cornell.edu/wex/miranda_warning">can have one appointed</a>. Lesser known is that this constitutional right applies only to criminal proceedings. In most civil trials, like bankruptcy proceedings, there is no <a href="https://www.law.cornell.edu/wex/right_to_counsel">right to an attorney</a>. When debtors cannot afford an attorney, they often must represent themselves.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/every-year-millions-try-to-navigate-us-courts-without-a-lawyer-84159">Every year, millions try to navigate US courts without a lawyer</a>
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<p>In student loan bankruptcy proceedings, 33% of debtors represent themselves, often to their detriment. We found that debtors who retained an attorney improved their chances of getting their student loans discharged by at least 60%. This was true whether the debtor was male or female.</p>
<p>The benefit of having an attorney in court is <a href="https://psycnet.apa.org/record/2004-16118-011">well-supported by research</a>. Attorneys who specialize in bankruptcy are likely to be aware of the factors upon which judges rely and can build a strong case for discharge. Without an attorney, it can be difficult to know which details to disclose and how to present them.</p>
<h2>Potential solutions</h2>
<p>Getting student loan debt discharged can be difficult and emotionally draining. </p>
<p>If you are thinking about seeking relief from student loan debt, the following suggestions may help.</p>
<p><strong>Develop a strategy that takes your gender into account:</strong> For single fathers, it might be advantageous to emphasize your “breadwinning” role, show the court that you have made efforts toward repaying the loans or have tried very hard to get a decent-paying job. For women with medical conditions, provide as much evidence as you can in the form of hospital visits, attempts to declare disability and the like.</p>
<p><strong>Regardless of gender, remember that having an attorney matters:</strong> Familiarize yourself with <a href="https://www.americanbar.org/groups/legal_services/flh-home/flh-free-legal-help/">legal aid organizations in your area</a>, which can offer free legal services. Also, be sure to search for <a href="https://www.uscourts.gov/services-forms/bankruptcy/filing-without-attorney">other free legal information</a> that can be found on <a href="https://www.flsb.uscourts.gov/dont-have-lawyer">court websites</a> and similar venues.</p>
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<p>None of this advice matters if you fail to file a separate case to get your student loans discharged – as is the case with most student loan debtors who file a bankruptcy case. Without the separate proceeding, students loans cannot be discharged. Around 241,000 people with student loan debt filed for bankruptcy in the U.S. in 2017, but <a href="https://ssrn.com/abstract=3715975">only 447 of those also filed a separate case to get rid of their student loans</a>. Consult the free legal resources to learn how to file this separate case.</p><img src="https://counter.theconversation.com/content/176218/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kelsey Lynne Hess receives funding from the National Conference of Bankruptcy Judges.</span></em></p><p class="fine-print"><em><span>Andrea C. F. Wolfs receives funding from the National Conference of Bankruptcy Judges. </span></em></p><p class="fine-print"><em><span>Deborah Goldfarb receives funding from the National Conference of Bankruptcy Judges, the National Institute of Justice, and the National Science Foundation. She is affiliated with the American Bar Association. </span></em></p><p class="fine-print"><em><span>Jacqueline R. Evans receives funding from the National Science Foundation, the National Institute of Justice, the Federal Bureau of Investigation, and the National Conference of Bankruptcy Judges. </span></em></p>When researchers examined the outcomes for cases to discharge student loan debt, they found that judges are often biased against people based on their gender and other factors.Kelsey Lynne Hess, Ph.D. Candidate in Legal Psychology, Florida International UniversityAndrea C. F. Wolfs, Teaching Professor in Psychology, Plymouth State UniversityDeborah Goldfarb, Assistant Professor of Psychology, Florida International UniversityJacqueline R. Evans, Associate Professor of Psychology, Florida International UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1683372021-10-11T12:21:25Z2021-10-11T12:21:25ZSexual abuse survivors are voting on the Boy Scouts bankruptcy settlement: 5 questions answered<figure><img src="https://images.theconversation.com/files/422465/original/file-20210921-23-1o9b6mr.jpg?ixlib=rb-1.1.0&rect=59%2C140%2C3481%2C1875&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Thousands of men say they were sexually abused as children taking part in the Boy Scouts.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BoyScoutsBankruptcy/b297e23fe3c44028a192107d01321ce2/photo?Query=boy%20AND%20scouts&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1439&currentItemNo=0">AP Photo/LM Otero</a></span></figcaption></figure><p><em>The Boy Scouts’ <a href="https://theconversation.com/by-filing-for-bankruptcy-the-boy-scouts-may-compensate-more-survivors-of-sexual-abuse-132163">bankruptcy case</a> <a href="https://abcnews.go.com/US/wireStory/boy-scouts-bankruptcy-plan-set-vote-abuse-claimants-80333568">crossed an important milestone</a> on Sept. 29, 2021, when Judge Laura Selber Silverstein <a href="https://www.wrdw.com/2021/09/30/boy-scouts-bankruptcy-plan-set-vote-by-abuse-claimants/">approved the Boy Scouts’ statement</a> that explains its plan to exit bankruptcy. That statement includes a proposal for compensating the <a href="https://www.usatoday.com/story/news/investigations/2020/11/16/boy-scouts-face-nearly-90-000-sex-abuse-claims-bankruptcy-case/6284153002/">tens of thousands of people who filed claims</a> attesting that they were sexually abused while participating in the Boy Scouts’ programs. Survivors now get a chance to vote on the Boy Scouts’ exit plan. But for the Boy Scouts to exit bankruptcy and continue operating, the judge must sign off on it.</em></p>
<h2>1. What does it mean that survivors will vote on the plan?</h2>
<p>The Boy Scouts filed bankruptcy in February 2020 in the wake of <a href="https://www.nytimes.com/2021/05/11/us/boy-scouts-bankruptcy-legal-fees.html">lawsuits publicly exposing the decades-long sexual abuse of Scouts</a>, with the intent to use bankruptcy to <a href="https://www.nytimes.com/2021/05/11/us/boy-scouts-bankruptcy-legal-fees.html">set up a fund to compensate survivors</a>. The <a href="https://www.reuters.com/legal/transactional/boy-scouts-abuse-settlements-are-still-too-low-victims-groups-say-2021-09-15/">Boy Scouts’ plan to exit bankruptcy includes settlements</a> with insurance companies, the Church of Jesus Christ of Latter-day Saints, which previously funded scouting activities, the Boy Scouts and its <a href="http://www.usscouts.org/usscouts/aboutbsa/bsa-map.asp">local councils</a>. These settlement deals total <a href="https://www.reuters.com/legal/transactional/boy-scouts-abuse-settlements-are-still-too-low-victims-groups-say-2021-09-15/">almost US$1.9 billion</a>.</p>
<p>The roughly 250 local councils will <a href="https://wvmetronews.com/2021/10/03/boy-scouts-councils-to-contribute-varying-amounts-to-abuse-fund/">contribute $500 million</a>, and the national umbrella organization, the Boy Scouts, will <a href="https://www.bloomberg.com/news/articles/2021-09-15/boy-scouts-settles-with-two-abuse-victim-groups-for-1-billion">put in up to $320 million</a>. Insurers and the Church of Jesus Christ of Latter-day Saints will collectively contribute a bit under $1.1 million. If the plan is approved, the settlement will <a href="https://www.usnews.com/news/us/articles/2021-09-30/boy-scouts-bankruptcy-plan-set-for-vote-by-abuse-claimants">prohibit further lawsuits</a> against the Boy Scouts and its local councils.</p>
<p>For the judge to approve the Boy Scouts’ plan, a majority of the nearly 82,000 survivors who filed claims in the bankruptcy case and businesses owed money by the Boy Scouts – that is, its creditors – must vote in favor of it. The survivors will receive <a href="http://usnews.com/news/us/articles/2021-09-30/boy-scouts-bankruptcy-plan-set-for-vote-by-abuse-claimants">ballots and informational packets</a> by mid-October. Survivors must return the ballots by Dec. 15, 2021. The votes will be tallied by Jan. 4, 2022. The judge has scheduled a hearing on Jan. 24, 2022, to consider the results of the voting and whether to approve the Boy Scouts’ bankruptcy exit plan. </p>
<p>Abuse claimants face a tough decision. Throughout the bankruptcy case, survivors and their attorneys have called out the Boy Scouts for neglecting to protect children for decades and instead <a href="https://myfox8.com/news/search-through-the-list-of-boy-scouts-leaders-accused-of-sexual-abuse/">shielding abusers</a>. The committee that represents abuse survivors as a whole in the bankruptcy case has counseled survivors to reject the plan and has stated that the plan is “<a href="https://www.usnews.com/news/us/articles/2021-09-30/boy-scouts-bankruptcy-plan-set-for-vote-by-abuse-claimants">grossly unfair</a>.” In contrast, attorneys separately representing tens of thousands of abuse claimants have encouraged survivors to vote in favor of the plan because they believe it is the <a href="https://www.usnews.com/news/us/articles/2021-09-30/boy-scouts-bankruptcy-plan-set-for-vote-by-abuse-claimants">best possible outcome</a>. </p>
<h2>2. How much money may abuse survivors receive?</h2>
<p>In addition to voting in favor of or against the plan, the ballot that survivors will receive requires them to choose between two options for payment. They can get an “<a href="https://www.usnews.com/news/us/articles/2021-09-30/boy-scouts-bankruptcy-plan-set-for-vote-by-abuse-claimants">expedited distribution</a>” payment of $3,500, with almost no questions asked. Or they can choose to go through an evaluation process of their abuse claim. If they choose the process, survivors will receive amounts based on the severity of the abuse they suffered and other criteria. Based on the criteria, a survivor could receive <a href="https://www.reuters.com/legal/transactional/boy-scouts-abuse-settlements-are-still-too-low-victims-groups-say-2021-09-15/">as little as $3,500 or as much as $2.7 million</a>.</p>
<h2>3. How could approval of the plan help the Boy Scouts?</h2>
<p>The Boy Scouts’ <a href="https://apnews.com/article/only-on-ap-health-coronavirus-pandemic-7afeb2667df0a391de3be67b38495972">membership has plunged in recent years</a>, decreasing by 43% from about 2 million in 2019 to 1.1 million in 2020. The decline is partly due to the public’s growing awareness of the alleged widespread molestation of Scouts and the Boy Scouts’ decades-long cover-up of the abuse.</p>
<p>There likely are other causes, such as the COVID-19 pandemic, the Boy Scouts’ battles over the <a href="https://www.latimes.com/nation/la-na-boy-scouts-evolution-2017-story.html">inclusion of LGBTQ individuals</a> and the Church of Jesus Christ of Latter-day Saints’ decision in 2019 to <a href="https://religionnews.com/2019/12/18/mormons-pulling-400000-youths-out-of-struggling-boy-scouts/">pull its 400,000 members</a> from the Boy Scouts to start its own youth program.</p>
<p>Every time there is news from the case, the Boy Scouts’ <a href="https://www.nytimes.com/2021/05/11/us/boy-scouts-bankruptcy-legal-fees.html">history of turning a blind eye to the abuse</a> is put on display again. As the case continues, churches and other organizations that historically have hosted Boy Scout troops and events may think twice about continuing their relationships, especially if they <a href="https://www.christianitytoday.com/news/2021/september/boy-scouts-church-lawsuit-abuse-bankrupcy-liability.html">worry about their own liability</a> for the abuse suits. </p>
<p>Approval of the Boy Scouts’ plan and settlement will finally close this chapter of the Boy Scouts’ history. This may allow the Boy Scouts to focus on rebuilding its programs, maintaining relationships with churches and other organizations, and forging new relationships.</p>
<h2>4. What happens if the plan is not confirmed?</h2>
<p>A possible outcome of the hearing scheduled in January 2022 is that the judge does not approve the plan. This might happen for several reasons. Not enough abuse survivors or other creditors may vote in favor of the plan. There also are a few elements of the settlement that the <a href="https://www.usnews.com/news/us/articles/2021-09-30/boy-scouts-bankruptcy-plan-set-for-vote-by-abuse-claimants">judge still must consider</a> before signing off.</p>
<p>If the judge does not approve the plan, the Boy Scouts’ bankruptcy case will continue. The Boy Scouts will return to negotiations with insurers, abuse survivors and others to try to craft another settlement agreement and bankruptcy exit plan. This outcome could make the bankruptcy case drag on even longer.</p>
<h2>5. What’s the significance of the voting process for survivors?</h2>
<p>Each survivor’s decision about how to vote is their own. Although survivors can seek guidance from their attorneys, the decision ultimately must be made by each of them. In bankruptcy, voting on the plan is the moment when everyone has a voice. </p>
<p>Abuse survivors finally have the chance to have their voice heard. They have the power to tell the Boy Scouts, through their vote, how they feel about how the Boy Scouts has responded to a deluge of abuse claims and the “<a href="https://www.seattletimes.com/seattle-news/times-watchdog/bsa-settlement-proposal/">price tag</a>” that has been attached to their pain. </p>
<p>[<em>Over 110,000 readers rely on The Conversation’s newsletter to understand the world.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=100Ksignup">Sign up today</a>.]</p><img src="https://counter.theconversation.com/content/168337/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pamela Foohey does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Thousands of adults who say they survived abuse when they were growing up finally have the chance to have their voice heard.Pamela Foohey, Professor of Law, Cardozo Law School, Yeshiva UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1689302021-09-30T20:06:33Z2021-09-30T20:06:33ZVital Signs: Evergrande may survive, but for its executives expect a fate worse than debt<figure><img src="https://images.theconversation.com/files/423971/original/file-20210930-16-wo1q4.jpg?ixlib=rb-1.1.0&rect=0%2C1008%2C7091%2C3556&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Alex Plaveski/AP</span></span></figcaption></figure><p>A large, financially interconnected company is on the verge of collapse, weighed down by massive debt. The government ponders a bailout. There’s no easy answer. Doing nothing risks serious financial upheaval. But bailing it out will signal that greed, irresponsibility and moral hazard have no consequences.</p>
<p>It’s a tough call. And if this all sounds eerily familiar, then you’re right. In 2008 the US government faced the dilemma with what to do about Lehman Brothers, the nation’s fourth-biggest investment bank which found itself unable to pay debts totalling more than US$600 billion.</p>
<p>Now the Chinese government is facing a comparable situation with Chinese property and financial behemoth Evergrande.</p>
<p>Lehman Brothers, established in 1847, survived the US Civil War, the Great Depression and two world Wars. Then in the feverish bubble of risky bets on the US mortgage market in the 1980s, it got into deep trouble. </p>
<p>US Treasury Secretary Hank Paulson — a former senior Wall Street executive — was, by all accounts, offended that Lehman had so recklessly gotten into this position. Why not send a message that the US government wasn’t going to bail out big banks who behaved badly?</p>
<p>The answer, it turned out, is that letting Lehman fail ricocheted through the US and global economy. </p>
<p>When Lehman filed for Chapter 11 bankruptcy protection, it was facing the largest bankruptcy in history. Those to whom it owed money were immediately put under pressure. That put those to whom they owed money under pressure. Money markets almost completely froze up. </p>
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Read more:
<a href="https://theconversation.com/vital-signs-the-gfc-and-me-ten-years-on-what-have-we-learned-103514">Vital Signs: the GFC and me. Ten years on, what have we learned?</a>
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<p>Even Goldman Sachs – Wall Street’s most venerable firm and basically on the good side of mortgage-market trades — was hammered. It took legendary investor Warren Buffett plowing US$5 billion into the company to avoid a modern-day bank run.</p>
<h2>China’s Lehman moment?</h2>
<p>Unlike Lehman Brothers, Evergrande isn’t an investment bank. Ostensibly it is a real estate developer, responsible for building apartments across China. But it has morphed into more than that — a highly leveraged and integrated company that does everything from banking to property development to selling electric cars.</p>
<p>Like many things in China, the true state of affairs is all a little unclear, but one reading is that Evergrande is basically a hedge fund with a property and vehicle business attached.</p>
<p>The proximate cause of concern is Evergrande missing an US$83 million interest payment on September 23. The clock is running, in that is has 30 days to “cure the breach” and figure out a way to pay. Otherwise things, as the cool kids say, will “start getting real”.</p>
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Read more:
<a href="https://theconversation.com/chinas-problem-with-property-the-domino-effect-of-evergrandes-huge-debts-168601">China's problem with property: the domino effect of Evergrande's huge debts</a>
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<p>For now disaster has been averted by Evergrande agreeing to sell off its stake in a local bank (Shengjing Bank) <a href="https://www.reuters.com/world/china/china-evergrande-transfer-15-bln-stake-shengjing-bank-state-firm-2021-09-29/">for nearly 10 billion yuan</a> (about US$1.5 billion) to the state-owned Shenyang Shengjing Finance Investment Group. </p>
<p>But Evergrande has US$300 billion in debt, so there’s really no running away from the issue for the Chinese authorities. If there are more dodgy dealings on Evergrande’s books then that US$1.5 billion will simply be buying time.</p>
<p>If things are as rotten in the state of Evergrande as many observers seem to think, then the Chinese government is going to have to bail it out, or let it fail. </p>
<p>In a sense, the CCP may be feeling “we’re all Hank Paulsons now”.</p>
<h2>China’s extra tools</h2>
<p>That said, there is an intriguing — if somewhat troubling — option available to Chinese authorities. </p>
<p>They could bail out the company but punish its top brass with serious personal sanctions. To put it bluntly, they don’t have to be concerned with the niceties of due process in the same way the US government does.</p>
<p>The Chinese government can, if it wishes, prevent the reverberations throughout the economy that would flow from an Evergrande collapse, but deter moral hazard in the future. It can send a very clear message of consequence for executives who engage in reckless and potentially corrupt behaviour. Maybe incarceration for life. Maybe worse.</p>
<p>It’s an interesting, if rather grim, example of the Tinbergen Rule — named after Jan Tinbergen, the winner of the <a href="https://www.nobelprize.org/prizes/economic-sciences/1969/tinbergen/facts/">first Nobel prize for economics</a>. This rule says for each policy challenge one requires an independent policy instrument. The US government had one. The Chinese regime has two.</p>
<h2>This all raises bigger issues</h2>
<p>Beyond this lie much bigger issues. How well have Chinese enterprises actually been performing? Up until now it looked like the answer was remarkably well. But is this all a mirage, sustained by the lack of transparency that shrouds all Chinese institutions?</p>
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Read more:
<a href="https://theconversation.com/china-is-financing-infrastructure-projects-around-the-world-many-could-harm-nature-and-indigenous-communities-168060">China is financing infrastructure projects around the world – many could harm nature and Indigenous communities</a>
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<p>It looks as if there may be two types of Chinese corporation: the ones that “make” things, which have been successful and still are, and the ones that “bank” things, which look disturbingly similar to their capitalist counterparts in the Western world when moral hazard and corruption are allowed to run rampant.</p>
<p>The shakeout of the coming years will reveal a lot about the economic bedrock of Chinese global power.</p><img src="https://counter.theconversation.com/content/168930/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is President-elect of the Academy of the Social Sciences in Australia.</span></em></p>Chinese authorities have an intriguing, if troubling, option in handling the Evergrande crisis.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1663082021-08-25T12:27:17Z2021-08-25T12:27:17ZCan student loans be cleared through bankruptcy? 4 questions answered<figure><img src="https://images.theconversation.com/files/417615/original/file-20210824-17-yedxbr.jpg?ixlib=rb-1.1.0&rect=11%2C0%2C3918%2C2610&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Proving that student loans are too hard to pay off is often a difficult burden to meet.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/college-and-money-royalty-free-image/1294785284?adppopup=true">Kameleon007</a></span></figcaption></figure><p><em>For decades, student loans have mostly been prohibited from being discharged through bankruptcy proceedings. That could change under the <a href="https://www.congress.gov/bill/117th-congress/senate-bill/2598/text">FRESH START through Bankruptcy Act</a>. Here, public policy scholars Brent Evans and Matthew Patrick Shaw, both of Vanderbilt University, explain why student loan debt cannot usually be cleared through bankruptcy and how that might change if the proposed bill becomes law</em>.</p>
<h2>Why can’t people get rid of student loans through bankruptcy now?</h2>
<p>Although not impossible, discharging student loans in bankruptcy is difficult. Due to <a href="https://www.tateesq.com/learn/student-loan-bankruptcy-law-history">a 1976 law</a>, student loans are not treated during bankruptcy proceedings like other forms of debt, such as credit card debt or auto loans. This policy stems from a <a href="https://books.google.com/books/about/Report_of_the_Commission_on_the_Bankrupt.html?id=q1JtuAEACAAJ">federal commission on bankruptcy laws</a>, which heard testimony that claimed the easy discharge of educational loans in bankruptcy could undermine federal student loan programs. Congress was concerned that students might borrow thousands of dollars from the federal government, graduate, declare bankruptcy to have their student loans discharged and never repay their educational debt.</p>
<p>In an extension of the <a href="https://www.investopedia.com/terms/h/higher-education-act-of-1965-hea.asp">Higher Education Act of 1965</a>, Congress passed the <a href="https://www.congress.gov/94/statute/STATUTE-90/STATUTE-90-Pg2081.pdf">1976 law</a>, which made borrowers wait five years after the first student loan payment was due before they could have the loan discharged through bankruptcy. Congress created an exception that allowed for discharge within that five-year period if the loan caused “undue hardship.”</p>
<p>Congress extended the five-year bankruptcy ban to seven years in <a href="https://www.congress.gov/101/statute/STATUTE-104/STATUTE-104-Pg4789.pdf">1990</a>. Then Congress extended it to the borrower’s lifetime in <a href="https://www.congress.gov/bill/105th-congress/house-bill/6/text?overview=closed">1998</a>.</p>
<p>Currently the “undue hardship” exemption is the only way to have student loans discharged in bankruptcy – that is a much higher threshold than many other common forms of debt. This higher threshold includes both federal student loans and, since <a href="https://www.govinfo.gov/content/pkg/PLAW-109publ8/html/PLAW-109publ8.htm">2005</a>, most forms of private student loans. </p>
<h2>Haven’t there been cases where people still got rid of their students loans through bankruptcy?</h2>
<p>Absolutely. Though difficult, it is still <a href="https://theconversation.com/can-you-get-rid-of-your-student-loans-by-filing-for-bankruptcy-130995">possible to have student loans discharged</a> through bankruptcy by meeting the undue hardship requirement. A 2011 study found that <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1894445">only 1 in 1,000 student loan borrowers who declared bankruptcy</a> even tried to have their student loans discharged. However, those that did succeeded at a rate of 40%.</p>
<p><a href="https://www.usbankruptcycode.org/chapter-5-creditors-the-debtor-and-the-estate/subchapter-ii-debtors-duties-and-benefits/section-523-exceptions-to-discharge/">Section 523 of the Bankruptcy Code</a> does not set out a specific test to determine what qualifies as undue hardship. The federal courts are split on what the appropriate standard should be for discharging student loan debt. The Second Circuit case, <a href="https://scholar.google.com/scholar_case?case=5270362258430051298&q=brunner+v.+new+york&hl=en&as_sdt=3,43">Brunner v. New York State Higher Education Services Corporation</a>, established three requirements that determine whether undue hardship applies.</p>
<p>First, the borrower must demonstrate that if forced to repay the student loans, they will be unable to meet a minimal standard of living based on income and bills.</p>
<p>Second, the borrower must be unable to repay for a “significant portion of the repayment period.”</p>
<p>Third, they must have made good-faith efforts to repay the student loan. </p>
<p>If a bankruptcy court agrees that a borrower meets these three requirements, the court can discharge the student loan debt. </p>
<p>But bankruptcy courts in the <a href="https://scholar.google.com/scholar_case?case=14163741936545416277&q=322+F.3d+549+(8th+Cir.+2003)&hl=en&as_sdt=6,43">Eighth Circuit</a> (in the Upper Midwest) — and occasionally courts in the <a href="https://scholar.google.com/scholar_case?case=14715509405075894100&q=435+B.R.+791+(B.A.P.+1st+Cir.+2010)&hl=en&as_sdt=6,43">First Circuit</a> (in Puerto Rico and parts of New England) — reject Brunner and examine the “totality of the circumstances” instead.</p>
<p>For example, the 2003 case <a href="https://scholar.google.com/scholar_case?case=14163741936545416277&q=322+F.3d+549+(8th+Cir.+2003)&hl=en&as_sdt=6,43">In re Long</a> states that a borrower can meet the undue hardship requirement in a different way from Brunner. The borrower must establish that they cannot meet a minimum standard of living given financial resources, necessary living expenses and other circumstances.</p>
<p>This test is considered less difficult to meet than Brunner because it does not require a borrower to establish “certainty of hopelessness” or “total incapacitation.”</p>
<h2>Explain the proposed law to allow bankruptcy for student loans</h2>
<p>If enacted, the bipartisan <a href="https://www.congress.gov/bill/117th-congress/senate-bill/2598/text">FRESH START through Bankruptcy Act</a> would change the current law to remove the lifetime ban on student loan discharge in bankruptcy and replace it with a 10-year ban. </p>
<p>Under the proposed law, if borrowers can show that paying their student loans caused undue hardship during the first 10 years, then they can get it discharged after that 10-year period is over without having to prove that it would be an undue hardship from that point forward.</p>
<p>This change would only apply to federal student loans, not private student loans. Any discharge of private student loans, regardless of the repayment timeline, would still require proving undue hardship.</p>
<p>To help shoulder some of the financial cost to the federal government of this proposed change, the bill also includes an accountability measure for colleges and universities. The schools would have to reimburse the government for a portion (either 50%, 30% or 20%) of the discharged student loan amount depending on the cohort default rate and repayment rate of the institution at the time the first loan payment comes due.</p>
<h2>Would bankruptcy become an attractive way to get rid of student loans?</h2>
<p>Declaring bankruptcy is not an ideal option to deal with student loans because it comes with substantial immediate and long-term consequences. The immediate consequence is that bankruptcy can result in the sale of property to pay off debts. The longer-term consequence is that, depending on the type, <a href="https://www.experian.com/blogs/ask-experian/bankruptcy-chapter-7-vs-chapter-13/">Chapter 7 or 13</a>, bankruptcy stays on credit reports for seven to 10 years. The substantial negative mark on credit reports means it will be more difficult to obtain a credit card, auto loan and mortgage. When any form of credit is obtained, the <a href="https://doi.org/10.1086/674573">interest rates are likely to be much higher</a> with a bankruptcy on record.</p>
<p>Another solution to a large student loan debt is to enroll in an <a href="https://studentaid.gov/manage-loans/repayment/plans/income-driven">income-driven repayment plan</a>, such as <a href="https://studentaid.gov/manage-loans/repayment/plans/income-driven#repaye">Revised Pay As You Earn</a>. These plans limit the amount of the monthly payment on federal student loans to a percentage of your <a href="https://studentaid.gov/help-center/answers/topic/glossary/article/discretionary-income">discretionary income</a>, which is the difference between your income and 150% of the state poverty guideline, adjusted for family size. </p>
<p>After 20 years of repayment for undergraduate loans (only 10 years if the borrower is in a public service job), the remaining balance is forgiven. If the new bill becomes law, borrowers in income-driven repayment plans will have a choice. They can either pursue bankruptcy after 10 years and suffer the consequences, or continue paying through loan forgiveness.</p>
<p>[<em>Over 110,000 readers rely on The Conversation’s newsletter to understand the world.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=100Ksignup">Sign up today</a>.]</p><img src="https://counter.theconversation.com/content/166308/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Congress first imposed a lifetime ban on discharging student loans through bankruptcy in 1998. Two scholars explain how that could change under a proposed law.Brent Evans, Assistant Professor of Public Policy & Higher Education, Vanderbilt UniversityMatthew Patrick Shaw, Assistant Professor of Public Policy, Education and Law, Vanderbilt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1594972021-06-02T12:25:15Z2021-06-02T12:25:15ZWhat are the ethics of giving back money that doesn’t belong to you?<figure><img src="https://images.theconversation.com/files/403196/original/file-20210527-17-yabmgj.jpg?ixlib=rb-1.1.0&rect=55%2C0%2C2733%2C1820&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Keeping what is not rightfully one's own reveals a lack of integrity and kindness.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/bank-clerk-counts-money-to-pay-government-employee-salaries-news-photo/455246198?adppopup=true">Mohammed Asad/Anadolu Agency/Getty Images</a></span></figcaption></figure><p>In Monopoly, a player who draws the card that says “BANK ERROR IN YOUR FAVOR. COLLECT $200” gets to keep the money.</p>
<p>But what happens when such a mistake occurs in real life?</p>
<p>Kelyn Spadoni, a 911 dispatcher, recently received quite a bit more than the US$80 she was expecting when financial brokerage firm <a href="https://fortune.com/2021/04/14/schwab-erroneously-1-2-million-customers-account-thingst-really-crazy/">Charles Schwab mistakenly transferred more than $1.2 million to her account</a>, apparently because of a software glitch. When she discovered the extra money, she promptly transferred those funds to her other accounts and bought a new car and house, among other purchases. </p>
<p>One could ask whether it was unethical for her to keep the money instead of trying to return it. As a <a href="https://scholar.google.com/citations?user=IdsBqSMAAAAJ&hl=en&authuser=1">scholar</a> who studies the ethics of debt and finance, I believe the answer is more complex than a simple “yes” or “no.” </p>
<h2>Yes, we should return money</h2>
<p>Consider another example: Suppose you found a wallet full of cash lying on the ground. Usually, the right thing to do would be to contact the wallet’s owner and return it, money included. </p>
<p>That’s because people have a prima facie obligation to return the belongings of others. Prima facie is a legal term, originally from Latin, that refers to something we take as correct until proven otherwise. A prima facie moral obligation is one that people normally have, unless there are special circumstances. </p>
<p>The Greek philosopher <a href="https://plato.stanford.edu/entries/aristotle/">Aristotle</a> helped to explain why people normally have a moral obligation to return the belongings of others. Being <a href="https://muse.jhu.edu/article/226160/pdf">truthful</a> and treating others fairly are key virtues in life, he argued. A good person acts with integrity and a <a href="https://plato.stanford.edu/entries/justice-virtue/">sense of justice</a> rather than being deceitful and <a href="https://doi.org/10.1023/A:1019714402975">greedy</a>. </p>
<p>Spadoni not only spent much of the money she mistakenly received, but she refused to respond when Charles Schwab contacted her. For a whole month she <a href="https://fortune.com/2021/04/14/schwab-erroneously-1-2-million-customers-account-thingst-really-crazy/">ignored calls, emails and text messages</a> the company sent her. She has since been arrested on charges of fraud and theft, apparently for trying to keep what did not not belong to her.</p>
<h2>Other issues to consider</h2>
<p>It would certainly be tempting to keep money that does not belong to you, but doing so is morally wrong when it is dishonest and greedy. However, matters are not always so cut and dried. </p>
<p>That’s because prima facie moral obligations depend on particular details of situations. Imagine, for instance, seeing a billionaire drop $10 on the ground. It would still be commendable to return that money, but the moral obligation to do so is weaker than in other cases.</p>
<p>Similarly, it is notable that in Spadoni’s case, she received money because of an error by a large financial institution. Moral obligations to individuals do not always translate to the institutional level, especially when an institution itself does not treat people with integrity and fairness. </p>
<p>Just since 2012, the Consumer Financial Protection Bureau has secured over <a href="https://www.consumerfinance.gov/enforcement/enforcement-by-the-numbers/">$12.9 billion</a> in relief for individuals whose rights were violated by financial companies. It would be unjust to hold an individual to moral standards that the financial company itself regularly violates.</p>
<p>Prima facie moral obligations can also be outweighed by other obligations. Imagine, for instance, that the person who found the wallet of cash needed money to provide housing or medical care for their children. Alternatively, imagine that the owner of the wallet was a notorious criminal who would use the returned cash to hurt others.</p>
<p>These scenarios identify additional prima facie moral obligations to care for people in need and prevent harm to others. Doing what is right in real life requires weighing all of the relevant moral considerations.</p>
<h2>The case of debt payments</h2>
<p>This is important because, while Spadoni’s case may appear unique, it is actually commonplace to receive money that belongs to others. </p>
<p>Credit cards, mortgages, student loans and payday loans, for example, are all forms of credit in which the borrower temporarily receives money that is not their own. </p>
<p>The moral considerations people face when trying to pay back debts mirror the questions about what to do with money that is found or received in error. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/403198/original/file-20210527-21-18s04si.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Students hold placards saying 'Abolish tuition' during a demonstration for tuition-free public colleges in New York City." src="https://images.theconversation.com/files/403198/original/file-20210527-21-18s04si.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/403198/original/file-20210527-21-18s04si.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/403198/original/file-20210527-21-18s04si.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/403198/original/file-20210527-21-18s04si.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/403198/original/file-20210527-21-18s04si.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/403198/original/file-20210527-21-18s04si.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/403198/original/file-20210527-21-18s04si.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Students in New York protest against mounting debt and ask for tuition-free public colleges.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/students-hold-placards-as-they-stage-a-demonstration-at-the-news-photo/496932156?adppopup=true">Cem Ozdel/Anadolu Agency/Getty Images</a></span>
</figcaption>
</figure>
<p>Prima facie, the moral obligation to pay these debts is apparent if we think of a loan as a kind of rental agreement. The borrower gets to use the money for a time but is expected to return it later, along with agreed-upon fees or interest.</p>
<p>However, other moral considerations are also relevant. Personal debt levels are now at a <a href="https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/hhdc_2021q1.pdf">record high</a> in the U.S., with more than <a href="https://www.federalreserve.gov/publications/files/2019-report-economic-well-being-us-households-202005.pdf">40%</a> of adults carrying a credit card balance every month.</p>
<p>In an economy saturated with debt, with more than half of adults living from <a href="https://highlandsolutions.com/blog/survey-reveals-spending-habits-during-covid-19">paycheck to paycheck</a>, people can end up being forced to choose between making debt payments and getting medical care or paying for rent. </p>
<p>A small number of them can get relief by filing for bankruptcy. Bankruptcy protections are meant to help those whose debts interfere with access to important goods and services like food, housing, education and medical care. The idea is that debts shouldn’t take away people’s ability to provide for themselves and their family. </p>
<p>However, a 2005 law made it <a href="https://www.nber.org/papers/w24934">more difficult and costly</a> to file for bankruptcy, especially for those who are already <a href="https://voxeu.org/article/bankruptcy-costs-and-america-s-household-debt-crisis">behind on bills</a>. Many of the people who would benefit from declaring bankruptcy are <a href="https://www.econstor.eu/bitstream/10419/167232/1/ifo-dice-report-v13-y2015-i4-p08-14.pdf">unable</a> to do so because they cannot afford the legal <a href="http://dx.doi.org/10.2139/ssrn.1540216">fees</a>. </p>
<p>Moreover, some of those debts result from predatory or outright fraudulent lending and collection practices. </p>
<p>Wells Fargo, for instance, was <a href="https://www.econstor.eu/bitstream/10419/167232/1/ifo-dice-report-v13-y2015-i4-p08-14.pdf">fined</a> $3 billion in 2018 for fraudulently signing people up for credit accounts with fees. And payday lenders operate by targeting people who are already <a href="https://www.google.com/books/edition/How_the_Other_Half_Banks/0yioCgAAQBAJ?hl=en&gbpv=0">struggling</a> to make ends meet and signing them up for loans they may not be able to repay on time. When borrowers miss a payment, they experience ballooning interest rates and fees, miring them <a href="http://dx.doi.org/10.2139/ssrn.2946399">further</a> in debt.</p>
<p>These examples indicate just some of the ways in which the obligation to return money to others really is a prima facie obligation and thus ultimately subject to limits in the real world. </p>
<p>[<em>Get the best of The Conversation, every weekend.</em> <a href="https://theconversation.com/us/newsletters/weekly-highlights-61?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=weeklybest">Sign up for our weekly newsletter</a>.]</p><img src="https://counter.theconversation.com/content/159497/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kate Padgett Walsh does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Charles Schwab mistakenly transferred over $1.2 million to the account of a woman who then kept the money. Did she have a moral obligation to return it? An expert says the answer is not that simple.Kate Padgett Walsh, Associate Professor of Philosophy, Iowa State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1604242021-05-12T18:09:26Z2021-05-12T18:09:26ZJudge rejects NRA’s bankruptcy bid, allowing New York’s lawsuit against the gun group to proceed: 5 questions answered<figure><img src="https://images.theconversation.com/files/400326/original/file-20210512-21-kyu1cp.jpg?ixlib=rb-1.1.0&rect=11%2C680%2C3615%2C1947&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Litigation against the gun group, which had been on hold, may now proceed.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/national-rifle-association-president-wayne-lapierre-speaks-news-photo/680196506">Zach D. Roberts/NurPhoto via Getty Images</a></span></figcaption></figure><p><em>A federal judge in Dallas said on May 11, 2021 that he was <a href="https://apnews.com/article/tx-state-wire-gun-politics-business-a281b888b64d391374f24539a820d60f">dismissing the National Rifle Association’s bankruptcy case</a> after finding that the gun group did not file it “<a href="https://lawandcrime.com/high-profile/judge-dismisses-the-nras-bankruptcy-petition-calls-wayne-lapierres-conduct-nothing-less-than-shocking/">in good faith</a>.” The <a href="https://theconversation.com/the-nra-declares-bankruptcy-5-questions-answered-153423">NRA filed for bankruptcy</a> on Jan. 15 as a means of relocating its charter from New York, where state <a href="https://theconversation.com/why-new-york-is-suing-the-nra-4-questions-answered-144108">Attorney General Letitia James is suing the NRA</a> and four of its current and former officials, to Texas. <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=3361640">Lindsey Simon</a>, a bankruptcy scholar at the University of Georgia School of Law, explains what the repercussions might be for the gun group and its leaders.</em></p>
<h2>1. What does this ruling mean?</h2>
<p>The <a href="https://assets.documentcloud.org/documents/20705869/nra-bankruptcy-ruling.pdf">NRA is no longer in bankruptcy</a>. Any <a href="https://apnews.com/article/election-2020-ap-top-news-new-york-lawsuits-dc-wire-056b7845ad1a35a68a4bf837329d9f6f">lawsuits or collection actions</a> that were pending before the bankruptcy, including those lodged by New York state authorities, can now resume their course.</p>
<h2>2. How did the judge explain his rationale?</h2>
<p>In his analysis, <a href="https://www.txnb.uscourts.gov/content/judge-harlin-d-hale">Judge Harlin Hale</a> followed the process required <a href="https://www.law.cornell.edu/uscode/text/11/1112">by Section 1112(b) of the U.S. Bankruptcy Code</a>, the provision that addresses dismissal.</p>
<p>First, he looked at all available evidence, including depositions, court filings and the many days of testimony from various witnesses to determine what the NRA’s primary purpose was for <a href="https://theconversation.com/the-nra-declares-bankruptcy-5-questions-answered-153423">filing bankruptcy</a>. Though the NRA gave a variety of different explanations, the court found that the nonprofit organization’s main driving force for filing Chapter 11 was avoiding dissolution in the <a href="https://theconversation.com/why-new-york-is-suing-the-nra-4-questions-answered-144108">pending action it faces in New York</a>.</p>
<p>Next, Hale determined that the NRA’s use of bankruptcy to avoid dissolution was not a “good faith” filing and should be dismissed because it sought an unfair advantage in the New York litigation. Finally, he found that appointing a Chapter 11 trustee or examiner, instead of dismissing the case, was not in the best interests of the NRA’s creditors or the nonprofit itself.</p>
<p>In making this conclusion, Hale noted that <a href="https://www.nraforward.org/">changes the NRA has recently made</a> such as additional disclosure and reporting mechanisms show the group’s officials understand how important compliance is going forward. He also observed that the NRA has the financial means to resolve its legal and organizational issues outside of bankruptcy. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/400127/original/file-20210511-21-1nq5z0r.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5518%2C3155&q=45&auto=format&w=1000&fit=clip"><img alt="A man in a cap with the NRA logo looks askance." src="https://images.theconversation.com/files/400127/original/file-20210511-21-1nq5z0r.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5518%2C3155&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/400127/original/file-20210511-21-1nq5z0r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=435&fit=crop&dpr=1 600w, https://images.theconversation.com/files/400127/original/file-20210511-21-1nq5z0r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=435&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/400127/original/file-20210511-21-1nq5z0r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=435&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/400127/original/file-20210511-21-1nq5z0r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=547&fit=crop&dpr=1 754w, https://images.theconversation.com/files/400127/original/file-20210511-21-1nq5z0r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=547&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/400127/original/file-20210511-21-1nq5z0r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=547&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">New York state authorities accuse the NRA of financial misdeeds.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/NRA%20Fraud%20Lawsuit/42fe9a24971c451c827561e299a793f8?Query=national%20rifle%20association&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1326&currentItemNo=7">AP Photo/Ted S. Warren</a></span>
</figcaption>
</figure>
<h2>3. What are the repercussions for the NRA’s leaders?</h2>
<p>All <a href="https://apnews.com/article/business-new-york-dallas-trials-gun-politics-e2585dce9bed6633e77a96223cd28d8b">legal actions against the NRA</a> will move forward in the jurisdiction where they were originally filed, rather than being heard by the bankruptcy court. As the <a href="https://www.nraforward.org/">NRA stated in its response</a>, the organization will have to “confront its adversaries” in New York instead of Texas. To the extent bankruptcy was intended to delay the litigation process or seek a different venue, those efforts have failed. </p>
<h2>4. Will this make a difference for anyone who says the NRA owes them money?</h2>
<p>Yes, this ruling will allow the NRA’s creditors, including any litigants who ultimately get judgments against the NRA, to pursue the full amount they are owed against the organization, and all of the NRA’s assets will be available to pay them back. If the NRA had remained in the bankruptcy process, claims would have been settled according to the terms in a <a href="https://www.investopedia.com/terms/c/chapter11.asp">plan of reorganization</a> – which often does not pay the full amount owed. The dismissal also removes the automatic stay, which paused any <a href="https://nrawatch.org/filing/nra-initial-list-of-creditors/">collection actions</a> against the NRA while the bankruptcy case was pending. <a href="https://www.washingtonpost.com/context/filing-showing-nra-unsecured-creditors-support-bankruptcy/d2af47b9-c673-49a6-a1c6-1d6e77a3602b/">The NRA’s creditors</a> are now free to collect on debts according to non-bankruptcy law.</p>
<h2>5. What did the public learn about the NRA from its bankruptcy case?</h2>
<p>The bankruptcy case exposed weaknesses within the NRA’s internal management structure as well as its strategy to avoid legal exposure. Most importantly, the public learned that the <a href="https://www.usatoday.com/story/money/2021/01/28/nra-bankruptcy-national-rifle-association-chapter-11/6657581002/">NRA is solvent</a> and can afford to pay its debts. </p>
<p>[<em>Over 100,000 readers rely on The Conversation’s newsletter to understand the world.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=100Ksignup">Sign up today</a>.]</p><img src="https://counter.theconversation.com/content/160424/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lindsey Simon does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Judge Harlin Hale found that the gun group wasn’t acting in ‘good faith’ when it filed for bankruptcy.Lindsey Simon, Assistant Professor of Law, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1557442021-03-10T19:07:37Z2021-03-10T19:07:37ZHard bump ahead? Drop in insolvencies and bankruptcies is a ticking time bomb<p>The vast arsenal of fiscal, monetary and legal measures used by Australian governments to offset the COVID-induced economic crisis have worked well. They did not prevent a recession (popularly defined as two quarters of negative GDP growth) but things could have been much worse.</p>
<p>What is particularly interesting is that the expected consequences have not shown up in the official statistics for financial distress – insolvent companies entering administration and individuals declaring bankruptcy. </p>
<p>Indeed, a misleading impression of 2020 being one of “economic good times” could be gained from the statistics. </p>
<p>The big question is whether these statistics show government relief measures have averted economic pain or simply deferred it. As measures are wound down and withdrawn, will the private sector be willing and able to pick up the resulting slack?</p>
<h2>Companies entering administration</h2>
<p>There are, of course, “lies, damn lies, and statistics”. The figures hide what is likely to be actually happening in terms of financial distress.</p>
<p>Impacts on businesses and individuals have been quite varied. Some large corporations have come through in good shape, much better than might have been imagined. But the tourism, hospitality, entertainment and higher education sectors have taken significant hits and face an uncertain and drawn-out recovery.</p>
<p>The following graphic, <a href="https://download.asic.gov.au/media/5946060/asic-insolvency-statistics-series-1-published-february-2021.xlsx">using data</a> from the Australian Securities and Investments Commission, shows the number of companies entering external administration (quarterly from 2010 to 2020). </p>
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<a href="https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graphic showing company insolvencies, 2011 to 2020" src="https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=511&fit=crop&dpr=1 754w, https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=511&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/388445/original/file-20210309-15-145s284.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=511&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<hr>
<p>Notable is the decline in business collapses in 2020 – the opposite of what one would expect in a time of economic stress. </p>
<p>A number of policy actions contributed to this. </p>
<p>The most obvious contributors to keeping failing businesses alive were JobKeeper payments as well as changes increasing “<a href="https://asic.gov.au/about-asic/news-centre/articles/directors-duties-in-the-context-of-covid-19/">safe-harbour protections</a>” to reduce the risk of prosecution for trading while insolvent. These changes also reduced the ability of creditors to speedily force a debtor company into insolvency.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/government-will-reform-insolvency-system-to-improve-distressed-small-businesses-survival-chances-146774">Government will reform insolvency system to improve distressed small businesses' survival chances</a>
</strong>
</em>
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<p>In many cases it is quite possible these simply put off that day to some time in 2021.</p>
<h2>Individuals declaring bankruptcy</h2>
<p>At the personal level, which includes owners of small unincorporated businesses, a similar pattern can be seen. </p>
<p>The next graph uses data from the <a href="https://www.afsa.gov.au/about-us/statistics/quarterly-personal-insolvency-statistics">Australian Financial Security Authority</a>. It shows the number of individuals entering into insolvency (bankruptcy, debt agreements etc) on a quarterly basis. The latest data is for the September quarter of 2020. The number had fallen to about half of what it had been prior to 2020.</p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graphic showing personal insolvencies in Australia 2011 to 2020." src="https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=511&fit=crop&dpr=1 754w, https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=511&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/388447/original/file-20210309-15-1y6u804.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=511&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
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<p>Notably, the number of personal insolvencies began falling in early 2018. There is no obvious single explanation for this trend, though good economic conditions and low interest rates are probably part of the story. </p>
<p>The further decline in 2020 (in contrast to expectations of an increase) is most likely due to legislative changes introduced in March 2020 and extended in September 2020. These include increasing the size of debt owed before a creditor can initiate action from A$5,000 to A$20,000, and allowing debtors six months (rather than 21 days) to respond to creditor demands. Mortgage repayment deferrals by banks also would have helped.</p>
<h2>A difficult balancing act</h2>
<p>What to make of these unexpected declines in official indicators of financial distress when economic conditions have surely increased the reality?</p>
<p>The more optimistic interpretation is that various government support measures have prevented both business and individuals sliding into insolvency. </p>
<p>The less optimistic interpretation is the measures have simply deferred the final outcome – with the statistics soon to show a bounce in business failures and personal insolvencies.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/were-facing-an-insolvency-tsunami-with-luck-these-changes-will-avert-the-worst-of-it-146833">We're facing an insolvency tsunami. With luck, these changes will avert the worst of it</a>
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</em>
</p>
<hr>
<p>There is no point keeping “zombie” businesses alive, nor in dissuading heavily indebted individuals from taking action under insolvency arrangements that can give them a fresh start. </p>
<p>But finding the right balance of continuing support for recoverable cases while terminating it for others (and limiting the hardship caused by failure) is a difficult and challenging task for our economic masters.</p><img src="https://counter.theconversation.com/content/155744/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>From some statistics 2020 looks like economic good times. Have relief measures averted economic pain or simply deferred it?Kevin Davis, Emeritus Professor of Finance, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1546332021-02-18T13:44:58Z2021-02-18T13:44:58ZI interviewed 48 bankrupt Americans – here’s who they blame for their financial troubles<figure><img src="https://images.theconversation.com/files/384581/original/file-20210216-21-a5jhhz.jpg?ixlib=rb-1.1.0&rect=6%2C26%2C4354%2C2877&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Preventing home foreclosure is one reason middle-class people may declare Chapter 13 personal bankruptcy.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com.mx/detail/foto/foreclosure-for-sale-sign-in-front-of-house-imagen-libre-de-derechos/157328426?adppopup=true">fstop123/E+ via Getty Images</a></span></figcaption></figure><p>The people arrested in connection with the Jan. 6 Capitol insurrection had an 18% bankruptcy rate – <a href="https://www.washingtonpost.com/business/2021/02/10/capitol-insurrectionists-jenna-ryan-financial-problems/">twice as high as the national average</a> – according to a Washington Post investigation. A quarter of the rioters had been sued by a creditor, and 1 in 5 faced losing their home to foreclosure. </p>
<p>As a scholar of American political economy who focuses on <a href="https://twise.people.amherst.edu/">middle-class economic precarity</a>, I found this discovery unsurprising.</p>
<p>Since 2017 I have interviewed 48 Americans going through <a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics">Chapter 13 personal bankruptcy</a> – the kind of bankruptcy primarily filed by people making above-median income or trying to save a home from foreclosure – and watched about 500 bankruptcy court proceedings. When talking about their bankruptcies with my research participants, I also touched on their life histories and politics. </p>
<p>Most did not blame the government or America’s lack of social safety net for their troubles. Instead, they blamed the “entitlement” of others for ruining things for “hardworking Americans.” More often than not, I found, <a href="https://dash.harvard.edu/handle/1/42029701">the “entitled” Americans they had in mind were members of minority groups</a>.</p>
<h2>Who’s on welfare? Not me</h2>
<p>This kind of racialized blame was most explicit among white, middle-aged Trump supporters, who comprised about one-third of my research participants. </p>
<p>In 2017, I interviewed a white mechanic and father of three from Utah who had filed personal bankruptcy after taking out payday loans to get treatment for his suicidal teenage son. His insurance covered only group therapy, so he paid US$5,000 out of pocket to send his son to a specialized treatment facility. </p>
<p>After listening to his story, I asked the mechanic – I’ll call him Greg – what he saw as the biggest challenges facing America. </p>
<p>“What drives me crazy is these people saying they need reparations from the Civil War,” Greg said, asserting that slavery was generations past and criticizing the idea that anyone today could feel entitled to compensation. </p>
<p>“That’s the problem with today’s society, kids especially: entitlement,” he concluded. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/384583/original/file-20210216-17-8f85zd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A Chapter 13 filing with calculator and gavel." src="https://images.theconversation.com/files/384583/original/file-20210216-17-8f85zd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/384583/original/file-20210216-17-8f85zd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/384583/original/file-20210216-17-8f85zd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/384583/original/file-20210216-17-8f85zd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/384583/original/file-20210216-17-8f85zd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/384583/original/file-20210216-17-8f85zd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/384583/original/file-20210216-17-8f85zd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">A personal bankruptcy form.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com.mx/detail/foto/bankruptcy-petition-for-individuals-with-imagen-libre-de-derechos/1286514050?adppopup=true">JJ Gouin/iStock via Getty Images</a></span>
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<p>I heard a similar sentiment from “Amy,” a white retail manager and mother of two from eastern Massachusetts. </p>
<p>Speaking of the shoplifters at her job, she said, “I tend to find that it’s the young welfare moms who do” it most, asserting that “most of the time they’re of the Black and Puerto Rican ethnicity.” </p>
<p>Amy told me she had previously relied on rent subsidies and other social services. But she didn’t seem to consider herself a “welfare mom.” </p>
<p>“All the time that I’ve worked and accomplished stuff in my life … and I can’t get assistance when I need it,” she said.</p>
<p>While white Trump supporters were more likely to identify people of color as undeserving recipients of government welfare, they weren’t the only ones. Some people of color in bankruptcy also invoked racial stereotypes about people who manipulate the system to gain an unfair advantage, albeit in a subtler fashion.</p>
<p>“I’ve never been on welfare, I have no illegitimate kids, I’ve never collected some food stamps. Why don’t I get rewarded for behaving better?” said a woman I’ll call Jennifer, a Black administrative assistant who was filing personal bankruptcy to save her condo in central Massachusetts from foreclosure. </p>
<h2>All in the family</h2>
<p>More than <a href="https://www.uscourts.gov/statistics/table/bapcpa-2d/bankruptcy-abuse-prevention-and-consumer-protection-act-bapcpa/2019/12/31">250,000 people undergo Chapter 13 bankruptcy every year in the United States</a>. Scholars find that <a href="https://press.princeton.edu/books/hardcover/9780691162966/american-insecurity">debt is anxiety-provoking</a> but that undergoing bankruptcy does not seem to create awareness of middle-class precarity or calls for a more robust American safety net. </p>
<p>But personal bankruptcy is actually part of America’s patchwork public-private safety net. </p>
<p>Each year, Americans get rid of <a href="https://www.uscourts.gov/statistics-reports/bapcpa-report-2019">more than $100 billion</a> in debt by filing for bankruptcy because the federal government says they do not have to pay it back. Research shows this debt-relief system <a href="https://doi.org/10.1177/1536504219830674">disproportionately benefits white Americans</a>, contributing to the <a href="https://www.brookings.edu/blog/up-front/2020/02/27/examining-the-black-white-wealth-gap/">increasing wealth gap between Black and white people</a>. </p>
<p>My research participants would likely bristle at the idea they were receiving a handout. They saw themselves as hardworking people who’d unfairly fallen on hard times while everyone else – particularly women, minorities and millennials – got an undeserved handout. </p>
<p>These narratives are part of something I call the Archie-Edith dynamic, referencing the 1970s sitcom “<a href="https://doi.org/10.1111/j.1460-2466.1974.tb00353.x">All in the Family</a>.” The protagonist of the show was a <a href="https://doi.org/10.1017/S1049096516002882">“lovable bigot,” Archie Bunker</a>, who railed against social change and political correctness. </p>
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<figcaption><span class="caption">Archie Bunker is openly racist in this clip from ‘All in the Family.’</span></figcaption>
</figure>
<p>I started looking into Archie Bunker after interviewing a white manager at a logistics company in eastern Massachusetts who actually called himself “Archie Bunker” in our conversation. This “Archie” partly attributed his bankruptcy to being overlooked at work because “females and minorities” were being promoted instead. </p>
<p>In the TV show “All in the Family,” Archie often succeeds in steamrolling the more moderate views of his wife, Edith. In real life, I found that the financially precarious Archie Bunker types often persuade others to go along with, or at least give credence to, their racialized explanation of economic strife. </p>
<p>For example, when I asked “Patty,” a white medical transcriptionist in bankruptcy, whether she felt social programs in the U.S. were abused, she said she hadn’t “been around people that have abused the system.” </p>
<p>But then “Patty” brought up her husband, a general contractor. </p>
<p>“He’s worked with some Hispanics who are not legal, but somehow they are able to pull off and collect money from the system,” she said, with agitation. “That’s a form of entitlement to me! You know?”</p><img src="https://counter.theconversation.com/content/154633/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tess Wise does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Few middle-class Americans undergoing Chapter 13 bankruptcy blame the government. They portray themselves as hardworking victims and resent others for taking more than their fair share.Tess Wise, Visiting Assistant Professor, Department of Political Science, Amherst CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1534232021-01-22T13:30:25Z2021-01-22T13:30:25ZThe NRA declares bankruptcy: 5 questions answered<figure><img src="https://images.theconversation.com/files/380005/original/file-20210121-15-1s40hu2.jpg?ixlib=rb-1.1.0&rect=127%2C0%2C5402%2C2818&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Facing legal and financial challenges, the NRA wants to exit New York.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/the-booth-of-the-national-rifle-association-of-america-is-news-photo/1208926268">Alex Wong/Getty Images</a></span></figcaption></figure><p><em>Editor’s note: Although the National Rifle Association is <a href="https://www.americas1stfreedom.org/articles/2020/3/10/nra-range-offers-more-than-target-time">headquartered in Northern Virginia</a>, it is incorporated in New York. The gun group recently announced a new “strategic plan” <a href="https://www.nraforward.org/press-release">to restructure under bankruptcy</a> and reincorporate in Texas. The Conversation U.S. asked accounting scholars <a href="https://scholar.google.com/citations?user=Rap6TboAAAAJ&hl=en&oi=ao">Brian Mittendorf</a> and <a href="https://scholar.google.com/citations?user=AZdAnBcAAAAJ&hl=en&oi=ao">Sarah Webber</a> to answer five key questions related to the NRA’s intentions.</em></p>
<h2>1. What precipitated this announcement?</h2>
<p><a href="https://theconversation.com/why-new-york-is-suing-the-nra-4-questions-answered-144108">New York Attorney General Letitia James</a> sued the NRA in 2020 over alleged financial irregularities, such as improperly making millions of dollars in payments to <a href="https://www.nbcnews.com/news/us-news/wayne-lapierre-allegedly-used-nra-personal-piggy-bank-n-y-n1236068">benefit longtime leader Wayne LaPierre</a> and <a href="https://www.theguardian.com/us-news/2020/aug/06/nra-accused-corruption-wayne-lapierre-wilson-phillips-joshua-powell-john-frazer">other executives</a>. Among the lawsuit’s allegations is a claim that the NRA tried to disguise trips to the Bahamas and other forms of lavish compensation as business expenses. James seeks to dissolve the organization. Though it disputes many of the charges, the organization has admitted to experiencing a “<a href="https://www.cnn.com/2020/11/25/politics/nra-assets-diversion-tax-filing/index.html">significant diversion of assets</a>” through reimbursements for personal expenses. These issues have also resulted in litigation stemming from the relationship with marketing and public relations firm <a href="https://www.thetrace.org/2020/08/financial-misconduct-nra-new-york-attorney-general/">Ackerman McQueen</a>.</p>
<p>A New York <a href="https://www.reuters.com/article/us-usa-guns-new-york-nra/judge-rejects-nra-bid-to-dismiss-or-move-lawsuit-by-new-york-attorney-general-idUSKBN29Q2ID">state judge on Jan. 21 dismissed</a> the NRA’s effort to quash the New York attorney general’s lawsuit or move it to a federal court in Albany, the state capital.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/380085/original/file-20210121-23-14n88os.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Photo of a woman wearing glasses, standing in front of a state crest and an American flag" src="https://images.theconversation.com/files/380085/original/file-20210121-23-14n88os.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/380085/original/file-20210121-23-14n88os.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/380085/original/file-20210121-23-14n88os.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/380085/original/file-20210121-23-14n88os.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/380085/original/file-20210121-23-14n88os.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/380085/original/file-20210121-23-14n88os.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/380085/original/file-20210121-23-14n88os.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">New York Attorney General Letitia James has sued the NRA.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/APTOPIX%20NRA%20Lawsuit/9cdbc72774ef48eb9d3f2b21fe27f5ab?Query=nra&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1350&currentItemNo=4">AP Photo/Kathy Willens</a></span>
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<h2>2. How might bankruptcy help the NRA reincorporate?</h2>
<p>When nonprofits file for bankruptcy, that generally <a href="https://uploads-ssl.webflow.com/5dd588105572e45c75cee528/5f7c8dd48d024b3a624210f8_What%20Nonprofit%20Leaders%20Should%20Know%20About%20Bankruptcy.pdf">halts pending litigation</a> while providing more time to pay off creditors. But there is an <a href="https://www.law.cornell.edu/uscode/text/11/362">exception for actions by governments</a>, such as the pending lawsuit the New York attorney general filed in 2020. The bankruptcy case <a href="https://www.bloombergquint.com/onweb/nra-runs-to-texas-but-perhaps-cannot-hide-with-bankruptcy-filing">could give the NRA more time</a> to proceed with reincorporation by stopping claims from creditors and also allow the bankruptcy court to decide how to distribute and organize the NRA’s assets. This shift in decision-making authority for the NRA’s assets may help the NRA with its reincorporation efforts. </p>
<h2>3. How does the pending New York dissolution case affect the NRA’s proposed bankruptcy reorganization?</h2>
<p>Incorporation in New York, where the group was <a href="https://theconversation.com/the-nras-journey-from-marksmanship-to-political-brinkmanship-92160">founded 150 years ago</a>, means that state regulates the nonprofit and thereby regulates the NRA’s finances. During the legal proceedings to dissolve the NRA in New York, the NRA may not <a href="https://www.thenonprofittimes.com/legal/nra-trying-to-change-venue-with-bankruptcy-filing/">transfer its assets</a>. While the NRA could set up a new corporation in Texas, the entity’s assets would not be released without consent from New York authorities. The NRA would need the bankruptcy court to have the ability to control the NRA’s assets to have a successful reorganization.</p>
<p>In short, given New York’s laws governing nonprofits, the NRA <a href="https://www.nysenate.gov/legislation/laws/NPC/1002">cannot dissolve without the state’s blessing</a>. And James responded to the NRA’s announcement by <a href="https://www.reuters.com/article/us-usa-guns/national-rifle-association-files-for-bankruptcy-seeking-to-escape-new-york-lawsuit-idUSKBN29K2LV">expressing her firm opposition</a> to reincorporation in Texas. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1350199191440674816"}"></div></p>
<h2>4. Is bankruptcy justified?</h2>
<p>Thanks to the NRA’s concurrent announcement that it <a href="https://www.nraforward.org/press-release">“is in its strongest financial condition in years,”</a> <a href="https://www.bloombergquint.com/onweb/nra-runs-to-texas-but-perhaps-cannot-hide-with-bankruptcy-filing">some observers have questioned</a> whether it is filing for bankruptcy in good faith. Based on the evidence currently available, it’s too early to tell whether bankruptcy is justified.</p>
<p>The NRA has experienced years of <a href="https://theconversation.com/financial-woes-are-at-the-heart-of-the-nras-tumult-116146">financial trouble</a>. There are <a href="https://theconversation.com/the-nras-financial-weakness-explained-108582">plenty of red flags</a> indicating a financial tsunami on the horizon, but no sign yet that one has hit. The organization had losses in each of the <a href="https://www.washingtonpost.com/politics/nra-irs-disclosure-990/2020/11/25/50521108-2d34-11eb-9c71-ccf2c0b8d571_story.html">past four years</a>, eroding its financial position.</p>
<p>The NRA has managed to show resilience in terms of keeping cash on hand, ending 2019 with <a href="https://beta.documentcloud.org/documents/20416927-nra-2019-990">cash and investments worth over $75 million</a>. Yet because it owes substantial amounts to others, the assets that the NRA had available to use at its discretion amounted to a nearly <a href="https://beta.documentcloud.org/documents/20416927-nra-2019-990">$50 million deficit in 2019</a>.</p>
<p>Having cut <a href="https://www.npr.org/2019/05/15/722960414/as-leaks-show-lavish-nra-spending-former-staff-detail-poor-conditions-at-nonprof">pension benefits</a>, made <a href="https://www.npr.org/2020/03/24/821122694/nra-plans-layoffs-20-cut-in-pay-for-employees-due-to-coronavirus-economic-hit">layoffs and pay cuts</a>, sold <a href="https://www.bloomberg.com/news/articles/2019-07-10/the-nra-uses-creative-accounting-to-post-surge-in-revenue">multiyear memberships</a> to boost revenues and even <a href="https://www.washingtonpost.com/investigations/the-nra-foundation-is-raising-money-by-auctioning-off-guns-in-schools--to-the-dismay-of-some-parents/2019/11/04/1edfa13a-d704-11e9-ab26-e6dbebac45d3_story.html">borrowed from its affiliated foundation</a>, the organization is running low on ways to shore up funds. In its latest <a href="https://www.charitiesnys.com/RegistrySearch/show_details.jsp?id=%7BBF41EBA8-7757-489D-B2EF-7CA122F9E56F%7D">financial audit</a> from 2019 filed with New York authorities, the NRA disclosed that a large portion of its debts – $35 million – come due in 2021. That disclosure further suggests why now might in fact be an apt time for the NRA to seek bankruptcy protection.</p>
<h2>5. Why does the NRA want to reincorporate in Texas?</h2>
<p>In seeking reincorporation, the NRA would be changing its legal home and changing which state’s laws will govern it. Reincorporation would not require the NRA to relocate its main offices, which are in Fairfax, Virginia.</p>
<p>Texas is seen as a <a href="https://www.texastribune.org/2021/01/15/texas-nra-bankruptcy-fraud/">pro-gun and debtor-friendly state</a>, and <a href="https://www.axios.com/nra-bankruptcy-restructuring-texas-cf34b56b-cdd3-476d-bc8c-47fe9d2f1133.html">observers believe that it may offer the NRA more protection</a> against claims from its creditors. That is, the NRA may hope that a federal bankruptcy court located in Texas will be more likely to rule in its favor regarding amounts owed to creditors than a New York or Virginia court.</p>
<p>However, the NRA faces significant challenges with both its bankruptcy case and the attempt to reincorporate. The Texas court may <a href="https://www.bloombergquint.com/onweb/nra-runs-to-texas-but-perhaps-cannot-hide-with-bankruptcy-filing">throw out the bankruptcy petition or move the bankruptcy case</a> to another location with more substantial ties, such as a court in Virginia or New York.</p>
<p>Another hurdle for the NRA to clear is demonstrating whether the <a href="https://www.investopedia.com/terms/c/chapter11.asp">Chapter 11 reorganization</a> it wants to undergo is necessary. If not, the bankruptcy judge could determine this move is a ploy to try to evade New York’s power to potentially take control of the NRA’s assets. The NRA maintains that it filed for bankruptcy <a href="https://today.westlaw.com/Document/Ib3b889e05b7c11ebaf7ba772a6053d8c/View/FullText.html">in good faith</a>.</p>
<p>[<em>Understand key political developments, each week.</em> <a href="https://theconversation.com/us/newsletters/politics-weekly-74/?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=politics-understand">Subscribe to The Conversation’s election newsletter</a>.]</p><img src="https://counter.theconversation.com/content/153423/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>While declaring bankruptcy, the gun group confusingly said it was in great financial shape.Brian Mittendorf, Fisher Designated Professor of Accounting, The Ohio State UniversitySarah Webber, Associate Professor of Accounting, University of DaytonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1505462020-11-24T03:44:38Z2020-11-24T03:44:38ZNews of the collapse of the Grocon empire is greatly exaggerated<p>Grocon, the Australian construction empire that grew from the family concreting business started by Luigi Grollo in Melbourne in 1948, is on its last legs.</p>
<p>But Grocon, the privately held property development empire headed by Luigi’s grandson Daniel Grollo, will continue to operate.</p>
<p>Media outlets have breathlessly reported Grollo’s announcement that Grocon’s construction business is insolvent, meaning it is no longer able to pay its debts, and that external administrators have been called in (as the law requires) to sort out if the business can be sold or its assets liquidated to pay off at least some of what is owed. </p>
<p>The Grocon group, though, is more than a construction business, having found better money-making opportunites in property development and being a landlord. It is a web of many legal entities and holding companies.</p>
<p>Exactly how much of the web is being put into administration is not yet clear – as a private company, disclosure requirements are fewer than those for public companies (listed on a stock exchange). </p>
<p>But based on Grocon’s track record – and common practice in the Australian building industry – the most likely upshot is that Grocon will cut its losses on ailing entities without affecting the profitable parts of the greater empire. </p>
<p>One thing seems sure, though. Daniel Grollo and other executives will not be at risk of losing their homes and livelihoods. The real losses will be felt by others. </p>
<h2>Development beats construction</h2>
<p>Luigi Grollo’s construction business began with pouring concrete on small projects. As time went by its projects got bigger. In the 1970s it moved beyond building for other entities into property development on its own account – acquiring land, gaining development approval, building and then selling or leasing the finished product. </p>
<p>Development, which requires a certain amount of vision, access to capital and solid political connections, is the route to making serious money. </p>
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Read more:
<a href="https://theconversation.com/federal-parliament-just-weakened-political-donations-laws-while-you-werent-watching-149171">Federal parliament just weakened political donations laws while you weren't watching</a>
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<p>Construction, by comparison, provides limited opportunities for a big payday and plenty of opportunities to make a hash of it. </p>
<p>The landscape for Australia’s “Tier 1” builders – the contractors able to take on the largest projects – has been poor for several years. </p>
<p>Lendlease, for example, announced <a href="https://www.smh.com.au/business/companies/lendlease-sells-troubled-engineering-business-to-spain-s-acciona-20191219-p53ln6.html">in December 2019</a> it was selling its engineering construction business to Spanish infrastructure conglomerate Acciona. The sale followed huge losses on projects such as the Melbourne Metro underground rail project and Sydney’s NorthConnex motorway tunnel project. </p>
<p>John Holland, the builder of Melbourne’s West Gate Tunnel and the Sydney Metro light-rail project, lost <a href="https://www.afr.com/companies/infrastructure/john-holland-slashes-jobs-in-restructure-20200612-p551w6">A$60 million in 2019</a>. CIMIC Group (previously known as Leighton) made a net loss <a href="https://www.afr.com/companies/infrastructure/cimic-loses-1b-dispute-with-chevron-20201020-p566pz">of A$1 billion</a>.</p>
<h2>Grocon’s Barangaroo stoush</h2>
<p>The stated catalyst for Grocon’s announcement about its construction business is a legal dispute with <a href="https://www.infrastructure.nsw.gov.au/">Infrastructure New South Wales</a>, the state authority overseeing the development of Sydney’s Barangaroo precinct. Different companies are developing and building different parts of the project. </p>
<p>In 2018 Crown Resorts and developer Lendlease fought and <a href="https://www.smh.com.au/national/nsw/james-packer-s-crown-resorts-has-win-in-court-fight-over-barangaroo-views-20181213-p50lzb.html">won a legal case</a> against Infrastructure NSW over fears buildings being built by a Grocon-led consortium as part of the “Central Barangaroo” precinct would block harbour views from Crown’s casino hotel and Lendlease’s high-rise apartments in the “Barangaroo South” precinct. </p>
<p>Grocon subsequently <a href="https://www.barangaroo.com/the-project/news/statement-on-central-barangaroo-development-rights/">pulled out</a> (selling its interests to Chinese partner Aqualand). It is suing Infrastruture NSW for <a href="https://www.abc.net.au/news/2020-11-20/grocon-boss-grollo-says-nsw-govt-to-blame-for-insolvency/12903958">A$270 million in compensation</a> for not informing Grocon it needed to factor in sight lines from the Crown Resorts and Lendlease buildings.</p>
<p>Grollo <a href="https://www.theaustralian.com.au/business/property/grocon-collapses-into-administration-blames-barangaroo/news-story/64f83b096a5605090237f48684eab659">blamed Infrastructure NSW</a> for “forcing our hand to place the construction business into administration”:</p>
<blockquote>
<p>While I have spoken before about moving Grocon away from the construction business model to new initiatives such as build to rent, I did not want to call in administrators.</p>
</blockquote>
<p>But Grollo has said such things before. </p>
<p>In October last year Grocon put <a href="https://www.commercialrealestate.com.au/news/grocon-puts-subsidiaries-into-administration-over-28m-spat-898494/">two subsidiaries into insolvency</a> over a dispute with commercial landlord Dexus involving A$28 million in unpaid rent for space leased in Brisbane’s 480 Queen Street building.</p>
<p>Grollo also declared he was doing this reluctantly <a href="https://www.theaustralian.com.au/business/property/grocon-pulls-the-pin-over-legal-stoush-with-dexus/news-story/ce14eb96a6a409a33003b745172454ac">but had been forced into it</a>.</p>
<p>Australian Securities and Investments Commission records indicate 27 Grocon entities have been deregistered or cancelled since about 2006. That leaves, by my count, 31 registered companies. How many of these will now be placed in administration is unclear. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/these-private-companies-pay-less-tax-than-we-do-but-reasons-remain-unclear-56680">These private companies pay less tax than we do – but reasons remain unclear</a>
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<h2>A notorious industry practice</h2>
<p>The construction industry is notorious for the use of insolvency and administration mechanisms, <a href="https://asic.gov.au/regulatory-resources/find-a-document/statistics/insolvency-statistics/insolvency-statistics-series-1a-companies-entering-external-administration-by-industry/">dominating the statistics</a> out of all proportion to its share of the economy.</p>
<p>Many in the industry see it as a normal business practice. </p>
<p>It’s a cost-effective solution, but it leaves subcontractors and other suppliers owed money in the lurch. It creates waves of bankruptcies among smaller businesses – electricians, plumbers, plasterers and so on – who have often secured business loans with their homes. Many are left destitute. It helps explain the industry’s <a href="https://www.theguardian.com/society/2019/aug/13/why-do-so-many-construction-workers-kill-themselves">high suicide rate</a>. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/is-illegal-phoenix-activity-rife-among-construction-companies-43111">Is illegal phoenix activity rife among construction companies?</a>
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</p>
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<h2>Privatising profits, socialising losses</h2>
<p>Is it right for a big operator with substantial resources to slice and dice its operating companies to ensure it continues to prosper while its subcontractor and consultant creditors are ruined?</p>
<p>The construction union – with which Grocon has long battled – has called <a href="https://cg.cfmeu.org/news/grocon-collapse-should-spur-national-security-payment-laws">for a national scheme</a> to compensate subcontractors when a head contractor goes bust. </p>
<p>But this is an invitation to continue to privatise profits and socialise losses. </p>
<p>The first step governments could take is to adopt procurement policies using value-based assessments rather than just choosing tenders based substantially on price.</p>
<p>They should also not try to transfer unmanageable risks to constructors and consultants, including setting unachievable budgets and programs.</p>
<p>This would encourage contractors to submit honest tenders and deliver quality projects without exploiting the smaller players they rely on. </p>
<p>Effective monitoring of downstream activities, including payments to subcontractors, is also vital. </p>
<p>If we are going to have a construction industry that does not rely on the public purse to pick up the pieces, we don’t need another inquiry or royal commission. We do need a co-ordinated effort to fix the obvious problems, including effective laws to stop insolvency and administration being standard business practice. </p>
<p>Administrators and liquidators should have readier access to the assets of other companies in a group and also the assets of directors.</p><img src="https://counter.theconversation.com/content/150546/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Geoff Hanmer has received funding from the Office of the Building Commissioner, NSW. He is a member of the AIA and the ACA. </span></em></p>Grocon as a construction business might be on its last legs, but Grocon as a property development and landlord business should be fine.Geoff Hanmer, Adjunct Professor of Architecture, University of AdelaideLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1468332020-09-28T00:48:58Z2020-09-28T00:48:58ZWe’re facing an insolvency tsunami. With luck, these changes will avert the worst of it<figure><img src="https://images.theconversation.com/files/360151/original/file-20200927-24-bx6l1q.jpg?ixlib=rb-1.1.0&rect=554%2C198%2C2600%2C1379&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Supamotion/Shutterstock</span></span></figcaption></figure><p>Ahead of the budget, the government has announced new rules that will allow small businesses at risk of collapse to continue to work out their problems instead of appointing an administrator.</p>
<p>They are needed because of an avalanche of insolvencies awaiting the end of an effective moratorium on bankruptcies (a so-called “regulatory shield”) that expires at the <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/extension-temporary-relief-financially-distressed">end of December</a>.</p>
<p>Since it was introduced in March the number of companies entering external administration has been unusually low compared to earlier years (at a time of unusually bad conditions) suggesting a buildup of zombie companies waiting to die.</p>
<hr>
<p><strong>Number of companies entering external administration</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/360148/original/file-20200927-18-82272w.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Twelve months to each week (red) versus previous twelve months.</span>
<span class="attribution"><a class="source" href="https://asic.gov.au/regulatory-resources/find-a-document/statistics/insolvency-statistics/insolvency-statistics-series-1b-notification-of-companies-entering-external-administration-weekly-update/">ASIC</a></span>
</figcaption>
</figure>
<hr>
<p>The new rules will allow insolvent small businesses with liabilities of less than A$1 million to keep trading under the eye of a <a href="https://ministers.treasury.gov.au/sites/ministers.treasury.gov.au/files/2020-09/Insolvency-Reforms-fact-sheet.pdf">small business restructuring practitioner</a> for 20 days while they develop a restructuring plan to put to creditors rather than surrender control to an external administrator.</p>
<p>If half the creditors by value endorse the plan it will be approved and the business can continue under its present ownership with assistance from the restructuring practitioner. If not, it can be put out of its life quickly under a proposed simplified liquidation process.</p>
<h2>Existing laws give directors little leeway</h2>
<p>Under the current insolvent trading law, directors are expected to immediately stop the trading when they know or have reasonable grounds to suspect the company is insolvent. Directors who “give it a go” and try to trade their way out of financial difficulty face severe legal consequences: personal liability, a fine of up to <a href="https://www.asic.gov.au/about-asic/asic-investigations-and-enforcement/fines-and-penalties/">$1.11 million per offence</a> or a prison sentence of up to 15 years in extreme cases.</p>
<p>The only way to avoid these penalties is to quickly place the company in the hands of the administrator who temporarily manages the business until the company’s creditors make a decision on the company’s fate.</p>
<p>Its a regime not particularly suited to small businesses. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australia-needs-new-insolvency-laws-to-encourage-small-businesses-84776">Australia needs new insolvency laws to encourage small businesses</a>
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<p>The proposed new rules can be seen as a tacit admission of the failure to the “<a href="https://www.bdo.com.au/en-au/accounting-news/accounting-news-may-2018/safe-harbour-insolvency-reforms">safe harbour</a>” law reform of 2017. Applicable to all companies irrespective of size, it protects directors from personal liability for debts incurred by an insolvent company if they took a course of action “reasonably likely to lead to a better outcome” for the company and its creditors than administration or liquidation.</p>
<p>Anecdotal evidence suggests it is largely shunned by small businesses in part because of its uncapped cost. The fees of small business restructuring practitioners will be capped.</p>
<h2>The new laws will create breathing space</h2>
<p>The new rules are based on <a href="https://www.investopedia.com/terms/c/chapter11.asp">Chapter 11</a> of the United States Bankruptcy Code, with important differences.</p>
<p>The US law applies to all Companies, not just to those with debts of less than $1 million. And it gives the court an oversight role.</p>
<p>The absence of judicial supervision in what’s proposed for Australia is a double-edged sword. Court involvement generally means delays and high costs.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/government-will-reform-insolvency-system-to-improve-distressed-small-businesses-survival-chances-146774">Government will reform insolvency system to improve distressed small businesses' survival chances</a>
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<p>On the other hand, it provides a valuable check against abuses – such as the deliberate liquidation and rebirth of “<a href="https://www.dissolve.com.au/information-centre/what-is-a-phoenix-company/">phoenix companies</a>” in order to avoid paying debts.</p>
<p>In Australia, that’ll be the role of the small business restructuring practitioner.</p>
<h2>It’s not yet clear how they’ll work</h2>
<p>It won’t be a panacea for small businesses. They will be required to lodge any outstanding tax returns and pay any employee entitlements before a plan can be put to creditors.</p>
<p>In the current circumstances many small businsses will not be able to comply.</p>
<p>There’s much we don’t yet know about what’s proposed. The government’s briefing says time and cost savings will be achieved through “<a href="https://ministers.treasury.gov.au/sites/ministers.treasury.gov.au/files/2020-09/Insolvency-Reforms-fact-sheet.pdf">reduced investigative requirements</a>”. It is unclear to what the extent the liquidator’s wide investigative powers into reasons for business failures will be curtailed. </p>
<p>The changes are likely to have profound implications for many stakeholders, including creditors, employees and the general community. </p>
<p>It is important that the government consults properly before the new rules are put to parliament in time for their introduction on January 1.</p><img src="https://counter.theconversation.com/content/146833/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anil Hargovan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The new rules will allow insolvent small businesses to keep trading rather than go straight into administration.Anil Hargovan, Associate Professor, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1412742020-06-24T20:18:20Z2020-06-24T20:18:20ZMortgage deferral, rent relief and bankruptcy: what you need to know if you have coronavirus money problems<figure><img src="https://images.theconversation.com/files/343372/original/file-20200623-188931-16vvu78.jpg?ixlib=rb-1.1.0&rect=9%2C0%2C5997%2C4016&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The coronavirus pandemic has wreaked havoc on the Australian economy, and the financial effects for many are deeply personal.</p>
<p>Sadly, there’s no shortage of terrible advice online when it comes to personal finance. And as September 30 looms - the date by which JobKeeper, the increased JobSeeker and many negotiated rent and mortgage deferrals end - it’s important to be fully informed before you make potentially life-changing financial decisions.</p>
<p>As a former financial counsellor and former consumer credit educator for the Australian Securities and Investments Commission (ASIC), here’s what I think you need to know if you’re considering mortgage deferral, rent relief or bankruptcy.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/going-bankrupt-is-a-life-changing-decision-so-why-is-the-process-to-do-it-so-easy-64971">Going bankrupt is a life changing decision – so why is the process to do it so easy?</a>
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</p>
<hr>
<h2>Mortgage deferral</h2>
<p>Residential mortgages are covered by <a href="https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-209-credit-licensing-responsible-lending-conduct/">federal legislation</a>, under which lenders can assist when borrowers can’t afford their usual repayments due to changed circumstances — such as losing hours or employment.</p>
<p>For example, you can ask your lender put on hold payments from June to September. It’s up to you and the creditor to establish clearly what happens to those payments. Are they pushed to the end of the contract, thereby extending the life of your loan? Or will you repay extra when you can afford repayments again? </p>
<p>Make sure you understand how much more it will cost you in additional interest if you extend the life of your loan by deferring these payments to the end of the contract. Depending on the details of your loan, you could be adding thousands of dollars to the amount you need to repay.</p>
<p>Most mortgage lenders don’t really want to repossess your house. It’s costly, time-consuming and stressful. But before asking for mortgage relief, you need to have a plan for the post-deferral period. </p>
<p>What happens if you still can’t make your usual repayments? Any licensed financial professional should be able to help negotiate a deferral on your mortgage or other consumer debts such as credit cards, but you should first consider seeing a free financial counsellor who is independent of any lenders. They can be contacted on 1800 007 007 or through the <a href="https://ndh.org.au/">National Debt Helpline</a> </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Before asking for debt relief, you need to have a plan for the post-deferral period.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<h2>Rent relief</h2>
<p>If you can’t pay your rent due to changed circumstances, you can ask your landlord to reduce or defer your rent. They can, of course, say no.</p>
<p>Unlike mortgage deferral, the implementation and process is inconsistent across states and territories. It can be difficult to navigate. </p>
<p>There are <a href="https://www.sbs.com.au/news/regulator-to-crack-down-on-real-estate-agents-pressuring-tenants-to-use-super">reports</a> of some landlords asking for comprehensive financial statements to support claims, or for their tenants to access the early release of up to <a href="https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/Early-access-to-your-super/#Compassionategrounds">A$10,000 in superannuation</a> to pay the rent. </p>
<p>Ausralia’s corporate watchdog, the Australian Securities and Investments Commission (ASIC), has <a href="https://download.asic.gov.au/media/5546344/asic-letter-response-to-early-release-of-super-state-rei-3-april-2020.pdf">warned real estate agents</a> that advising tenants to take money from their superannuation may constitute giving unlicensed financial advice and/or be against people’s best interests, attracting possible fines and jail time.</p>
<p>If you’re talking with your landlord about rent relief, be clear on whether you’re talking about rent payments being reduced, deferred or permanently waived, and whether these payments would need to be made up by a certain date. Renters can seek help from <a href="https://ndh.org.au/">free financial counsellors</a> or a <a href="https://www.tenants.org.au/covid19/guide">tenants’ union</a>. </p>
<p>State and territory governments have established various schemes to help renters work out agreements with their landlord (see this <a href="https://www.commerce.wa.gov.au/consumer-protection/covid-19-residential-tenancies-mandatory-conciliation-service">Western Australian</a> scheme as an example).</p>
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<em>
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Read more:
<a href="https://theconversation.com/what-if-i-cant-pay-my-rent-these-are-the-options-for-rent-relief-in-australia-135312">What if I can't pay my rent? These are the options for rent relief in Australia</a>
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<h2>Bankruptcy</h2>
<p>Bankruptcy should be a last resort. Many creditors have shown they’re willing to provide short-term delays (for about 90 days, for example) if people need more time to pay a debt.</p>
<p>Consumer credit contracts are written on the basis that life has its ups and downs and if a debtor genuinely can’t pay, the creditor can help by reducing payments, stopping interest charges, deferring payments and/or restructuring loans.</p>
<p>In almost all consumer bankruptcies, there is no return to creditors so they generally don’t want debtors to go bankrupt. It’s in their interest to help debtors through a difficult period so they can return to making payments. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Call the National Debt Hotline before you make any big decisions around bankruptcy.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<p>Of great concern to consumer advocates is that searching “bankruptcy” or “help with debts” on the internet will often generate results for companies with a vested interest in placing you in what’s called a “debt agreement”. These should be approached with caution. It basically means you pay for a company to help you declare bankruptcy - but this is unnecessary. </p>
<p>A debt agreement is an act of bankruptcy that directs fees to those companies and quite often places consumers in unmanageable and unsustainable long-term repayment plans. </p>
<p>Instead, try to find free financial counsellors, some of whom work for charities. They are professional, unbiased and expert at informing people of their options when in debt. They can be found via the government’s <a href="https://moneysmart.gov.au/managing-debt/financial-counselling">MoneySmart</a> site.</p>
<p>If you can’t pay your debts, there are many <a href="https://www.afsa.gov.au/debtrelief">options available</a>. The key is contacting the right person or organisation - and knowing whatever comes up first in a Google search is not necessarily the best or most impartial place to get help in a financial crisis.</p><img src="https://counter.theconversation.com/content/141274/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gregory Mowle is a former financial counsellor and former consumer credit educator for ASIC.</span></em></p>As a former financial counsellor and former consumer credit educator for ASIC, here’s what I think you need to know if you’re considering mortgage deferral, rent relief or bankruptcy.Gregory Mowle, Lecturer in Finance, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1405172020-06-18T12:19:04Z2020-06-18T12:19:04ZWhat do struggling small businesses need most? Time – and bankruptcy can provide it<figure><img src="https://images.theconversation.com/files/342538/original/file-20200617-94044-c3lefm.jpg?ixlib=rb-1.1.0&rect=90%2C147%2C5373%2C3489&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">For some small businesses, temporary will become permanent.</span> <span class="attribution"><span class="source">AP Photo/Elaine Thompson</span></span></figcaption></figure><p>The coronavirus pandemic and lockdown <a href="https://www.oberlo.com/blog/small-business-statistics#:%7E:text=Small%20companies%20create%201.5%20million%20jobs%20annually%20and%20account%20for,small%20and%20medium%2Dsized%20businesses">forced nearly a third</a> of all small businesses in the United States to close. Some <a href="https://www.washingtonpost.com/business/2020/05/12/small-business-used-define-americas-economy-pandemic-could-end-that-forever">have shut down for good</a> – one <a href="http://www.doi.org/10.3386/w26989">estimate puts the percentage</a> at almost 2%, or over 100,000 so far. </p>
<p>Those that remain and are gradually opening up must navigate a host of restrictions, including <a href="https://www.latimes.com/california/story/2020-05-17/coronavirus-la-businesses-reopening-curbside-service-challenges">limits on customers</a>, who themselves <a href="https://www.bostonglobe.com/2020/04/28/business/getting-haircut-may-never-be-same-after-coronavirus/">may be reluctant</a> to get a haircut, dine out or engage in other activities that put them near others. Even in parts of the country that <a href="https://www.theguardian.com/us-news/2020/may/06/missouri-coronavirus-economy-governor-mike-parson">haven’t yet experienced a lot</a> of COVID-19 cases, businesses have reopened to <a href="https://www.npr.org/2020/05/18/857872960/businesses-are-reopening-but-customers-may-not-be-ready-to-go-back">significantly smaller crowds</a>, <a href="https://time.com/5835435/coronavirus-business-reopen-struggling/">imperiling their survival</a>.</p>
<p>What these businesses need most right now is time – breathing space that temporarily freezes expenses while letting them continue to operate and figure out a plan to keep going. In many cases, that means declaring bankruptcy. </p>
<p>While bankruptcy is often associated with going out of business, it’s also meant to help viable companies develop a path back to profitability. The problem is bankruptcy law doesn’t provide enough time to do this in the middle of a pandemic. Ongoing health concerns will likely subdue economic activity for who knows how long, even as bills and other costs pile up. </p>
<p>As <a href="https://scholar.google.com/citations?user=9cadkB0AAAAJ&hl=en&oi=ao">bankruptcy</a> <a href="https://law.vanderbilt.edu/bio/paige-skiba">scholars</a>, we believe there’s a way to fix this.</p>
<h2>Job creators</h2>
<p><a href="https://theconversation.com/can-a-business-still-be-small-with-500-employees-137449">Small businesses</a> – specifically, those with fewer than 20 employees, like your local restaurant, nail salon and pet sitter – <a href="https://www.oberlo.com/blog/small-business-statistics#:%7E:text=Small%20companies%20create%201.5%20million%20jobs%20annually%20and%20account%20for,small%20and%20medium%2Dsized%20businesses">make up roughly 90%</a> of all private companies and account for nearly two-thirds of all <a href="https://www.oberlo.com/blog/small-business-statistics#:%7E:text=Small%20companies%20create%201.5%20million%20jobs%20annually%20and%20account%20for,small%20and%20medium%2Dsized%20businesses">new jobs</a> created in the U.S.</p>
<p>The temporary or permanent closures of so many contributed considerably to the historic levels of unemployment experienced in <a href="https://www.bls.gov/opub/ted/2020/unemployment-rate-rises-to-record-high-14-point-7-percent-in-april-2020.htm">April and May</a>.</p>
<p>To <a href="https://theconversation.com/what-is-the-sba-an-unheralded-agency-faces-the-unprecedented-task-of-saving-americas-small-businesses-136106">save small businesses</a> and the millions they employ, Congress created the <a href="https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program">Paycheck Protection Program</a>, which can lend as much as <a href="https://www.journalofaccountancy.com/news/2020/jun/ppp-loans-provide-lifeline-but-more-needed.html">US$659 billion</a>. But businesses must use most of the proceeds for payroll. Companies still have to pay rent, utilities, insurance premiums and a host of other ongoing costs. While some have been able to defer these expenses, they can’t do so forever. Businesses will eventually be forced to deal with unpaid, unmet obligations. </p>
<p>Some businesses may have enough savings to ride out the pandemic or can access fresh capital from owners – who often wipe out their <a href="https://www.globest.com/2020/05/29/small-businesses-are-using-personal-funds-to-stay-afloat/?slreturn=20200516134627">personal savings</a>, including <a href="https://www.wsj.com/articles/coronavirus-complicates-closing-up-shop-for-older-owners-1159180645">retirement funds</a>, in the process. But for so many others, the crush of past-due expenses will threaten their ability to continue to operate, even if the business model is sound overall.</p>
<h2>Bankruptcy to the rescue</h2>
<p>While bankruptcy usually serves as an organized way to close down permanently, it can also be used to hold off creditors while a company restructures its debts and continues operations <a href="https://www.uscourts.gov/sites/default/files/data_tables/jff_7.3_0930.2019.pdf">under Chapter 11</a>. Upon filing, an <a href="https://www.cacb.uscourts.gov/faq/automatic-stay-what-it-and-does-it-protect-debtor-all-creditors">automatic stay</a> on collection efforts goes into effect, which prevents eviction, foreclosure or repossession of inventory and equipment while the business comes up with a plan.</p>
<p>For many businesses struggling in the aftermath of COVID-19, however, the issue is not a backlog of debt but simply a lack of immediate revenue to make short-term obligations, especially rent and payroll. And there’s really no knowing how long revenue will remain below normal, with <a href="https://www.nytimes.com/2020/06/15/world/coronavirus-live-updates.html">concerns that infection rates are soaring</a> in parts of the country that are opening up.</p>
<p>Until recently, very few small businesses were able to <a href="https://www.theguardian.com/business/2019/sep/08/us-small-businesses-bankruptcy-trump-reorganization-act">reorganize successfully</a> under Chapter 11, opting instead to find alternative solutions under state law or to simply <a href="https://www.talksonlaw.com/talks/law-in-the-time-of-covid-19-part-2">go out of business altogether</a>. Last year, Congress <a href="https://www.thsh.com/publications/the-small-business-reorganization-act-of-2019-gives-financially-distressed-small-businesses-a-new-lifeline">made it a little easier</a> for companies with less than $2.7 million in debt to navigate bankruptcy successfully, by reducing the regulatory burdens and offering more support. </p>
<p>But, even after lawmakers increased the debt ceiling to $7.5 million as part of their <a href="https://www.natlawreview.com/article/small-business-reorganization-act-2019-and-cares-act-expanded-restructuring">coronavirus response</a>, small businesses still don’t have what they need most right now: time. </p>
<p>In bankruptcy cases, debtors are required to adhere to extremely strict time frames, many of which are <a href="http://media.mcguirewoods.com/publications/2017/Small-Business-Deadlines-Expiration-Extension-and-Consequences.pdf">accelerated for small businesses</a>. Upon filing, debtors are required to meet with the court quickly to present a proposed plan for how they expect to be profitable going forward. Debtors have 90 days to come up with a plan, under which they can repay most creditors slowly – over the next three to five years. </p>
<p>There’s an important exception, however, for rent payments. If debtors wish to retain their leases, they need to pay timely rent going forward immediately after filing – and have to repay all past-due rent in full <a href="https://www.jimersonfirm.com/blog/2020/04/commercial-leases-bankruptcy/">as soon as their plan is confirmed</a>. In other words, while there’s some wiggle room with other past-due bills, such as wages, utilities and even taxes, there’s a hard deadline with rent, which for many is the largest expense of all. </p>
<p>These time frames and special rules regarding rent were drafted with a normal, functioning economy in mind, and did not take into account the disruption caused by a global pandemic. </p>
<h2>Respite needed</h2>
<p>A recent <a href="https://www.dropbox.com/s/gabrkhhdpkx7xge/Small%20Business%20Letter%20Final%205.26.20.pdf?dl=0%22%22">proposal delivered to Congress</a> by a group of bankruptcy scholars – including us – recommended giving small businesses affected by the global pandemic extra time during the bankruptcy process. </p>
<p>The proposed changes would freeze bill collection as normal, but also freeze court proceedings for the next six months – a desperately needed respite after which the long-term effects of the pandemic may be better understood. </p>
<p>This recommendation would encourage landlords to negotiate with debtors by providing debtors with court-mandated breathing room to escape the otherwise inflexible provisions surrounding rent. </p>
<p>It is our hope that this would afford such businesses the time and space they need to remain the backbone of the U.S. economy.</p>
<p>[<em><a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=expertise">Expertise in your inbox. Sign up for The Conversation’s newsletter and get a digest of academic takes on today’s news, every day.</a></em>]</p><img src="https://counter.theconversation.com/content/140517/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Bankruptcy is meant to offer breathing space to struggling companies, but it may not be enough given the unpredictable nature of the pandemic.Brook Gotberg, Associate Professor of Law, University of Missouri-ColumbiaPaige Marta Skiba, Economist, Professor of Law, Vanderbilt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1391772020-06-02T12:22:08Z2020-06-02T12:22:08ZAttack of zombie companies: don’t let them eat bailouts that are vital to restore the economy<figure><img src="https://images.theconversation.com/files/337029/original/file-20200522-124851-fw185l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> </figcaption></figure><p>Governments are all deciding which struggling companies to help out in the COVID-19 pandemic. Among the many looking for help, some have a strange deathly pallor. </p>
<p>This is nothing to do with whether they trade in sectors whose futures look very uncertain – though many do. For years, these companies have been struggling to pay the interest on their large debts, let alone the principal, despite the long period of very low interest rates. Some were on their way to failure. The buoyant economy before coronavirus kept them just about stumbling along. </p>
<p>There are many of these zombies in our midst, and whatever public money they receive means less available for firms that were healthy before the pandemic. Morgan Stanley <a href="https://www.ft.com/content/cc31fe38-8adb-11ea-9dcb-fe6871f4145a">estimates that</a> as many as 16% of US companies are zombies, while there are plenty in <a href="https://asia.nikkei.com/Spotlight/Datawatch/Asia-s-zombies-concentrated-in-India-Indonesia-and-South-Korea">Asia</a> and <a href="https://www.finanzen.ch/nachrichten/konjunktur/euler-hermes-auf-unternehmen-rollt-wegen-corona-pleitewelle-zu-1029186352">Europe</a> too. </p>
<h2>Bad medicine</h2>
<p>Various countries <a href="https://www.ft.com/content/26af5520-6793-11ea-800d-da70cff6e4d3">have given financial aid</a> to the private sector in recent months, including extending credit and grants to companies. More aid is likely on the way. As more and more companies run into trouble, governments will have to decide when and how to step in. </p>
<p>Even in better times during the last three years, <a href="https://www.uscourts.gov/news/2019/04/22/bankruptcy-filings-continue-decline">US bankruptcies averaged</a> 23,000 firms per year. Some of them may have failed because of zombie firms, since <a href="https://oecdecoscope.blog/2017/12/06/zombie-firms-and-weak-productivity-what-role-for-policy/">research suggests</a> they crowd out credit from other candidates even in the best of times. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/337033/original/file-20200522-124860-pydv9a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/337033/original/file-20200522-124860-pydv9a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/337033/original/file-20200522-124860-pydv9a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=803&fit=crop&dpr=1 600w, https://images.theconversation.com/files/337033/original/file-20200522-124860-pydv9a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=803&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/337033/original/file-20200522-124860-pydv9a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=803&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/337033/original/file-20200522-124860-pydv9a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1009&fit=crop&dpr=1 754w, https://images.theconversation.com/files/337033/original/file-20200522-124860-pydv9a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1009&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/337033/original/file-20200522-124860-pydv9a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1009&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Joseph Schumpeter: life through death.</span>
<span class="attribution"><a class="source" href="https://en.wikipedia.org/wiki/Joseph_Schumpeter#/media/File:Joseph_Schumpeter_ekonomialaria.jpg">Wikimedia</a></span>
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<p>In normal circumstances, however, business failures are actually good for society – tragic as they are for business owners and their employees. The victims are able to take risks and try new things, without which there can’t be progress. This “creative destruction”, as the Austrian economist Joseph Schumpeter <a href="https://www.nytimes.com/2000/06/10/your-money/IHT-half-a-century-later-economists-creative-destruction-theory-is.html">described it</a>, is a necessary part of capitalism. Governments and central bankers rightly fight the effects of recessions on citizens – this year’s cash payments to American workers <a href="https://www.brownadvisory.com/us/cares-act-first-look#:%7E:text=The%20CARES%20Act%20provides%20almost,affect%20businesses%20and%20individuals%2C%20and">would be an example</a> – but recessions are often necessary corrections to over-exuberance in business. </p>
<p>So while the pandemic is very unusual, in one sense we must view it like any recession. For this reason, governments don’t need to worry about the business failure rate but about the excess failure rate – for example, US bankruptcies <a href="https://tradingeconomics.com/united-states/bankruptcies">hit around</a> 60,000 firms in 2010, so that may be a useful yardstick this time around. </p>
<h2>Zombie handling</h2>
<p>The US government, among others, has left itself open to propping up zombies by <a href="https://www.clearygottlieb.com/news-and-insights/publication-listing/president-signs-cares-act-emergency-relief-provided-to-businesses-and-consumers">offering emergency relief</a> to all struggling businesses, regardless of their financial picture before the pandemic. <a href="https://www.ft.com/content/0467d0e1-6814-4cc4-ad4b-e25c80169466">The rush</a> of American small businesses to access funding illustrates how quickly money can move in the wrong direction. It demonstrates the need to think out the rules carefully in advance. </p>
<p>It would have been smarter to focus on mechanisms that choose between struggling businesses. Whereas under the emergency relief programme, banks lend to any business knowing the government will cover the debts, one option for the future is to just to stimulate bank lending and let banks choose who to lend to. This way they have skin in the game and the weak can be allowed to fail. </p>
<p>Another option would be to let vulnerable companies work themselves out in the normal bankruptcy reorganisation process (Chapter 11 in the US, administration <a href="https://www.thegazette.co.uk/all-notices/content/100263/">in the UK</a>). For example, the biggest US airlines <a href="https://www.bloombergquint.com/onweb/u-s-airlines-spent-96-of-free-cash-flow-on-buybacks-chart">spent almost all</a> their free cash flow on share buybacks over the last decade, sometimes going heavily into debt to do so. This benefited their shareholders and bondholders, so it’s appropriate that they take the hits. Once a company has been reorganised, government aid could then be made available to prop up the “good” parts that remain. </p>
<p>Some will argue that certain firms are too big to fail. Japan resisted letting their big companies die in the “lost decade” of the 1990s, but when it did the economy improved. South Korea had a <a href="https://www.economist.com/business/1999/08/19/the-death-of-daewoo">similar experience</a> with Daewoo. </p>
<p><a href="https://milestalk.com/virgins-airlines-on-brink-of-collapse-branson-offers-necker-island-as-loan-collateral/">Some have tried to make</a> the same argument about Virgin Atlantic being too big to fail today. A look at the financials suggests the UK government was likely correct to <a href="https://simpleflying.com/virgin-atlantic-interest/">initially reject</a> its request for £500 million in state aid, especially as Virgin had not tried to seek investments from other sources. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/339153/original/file-20200602-133892-1q0v66.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/339153/original/file-20200602-133892-1q0v66.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/339153/original/file-20200602-133892-1q0v66.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/339153/original/file-20200602-133892-1q0v66.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/339153/original/file-20200602-133892-1q0v66.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/339153/original/file-20200602-133892-1q0v66.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/339153/original/file-20200602-133892-1q0v66.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/339153/original/file-20200602-133892-1q0v66.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Too big to fail?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/manchester-united-kingdom-april-21st-2018-1077136793">Craig Russell</a></span>
</figcaption>
</figure>
<p>The airline <a href="https://www.ft.com/content/fe163e1a-5b7e-11e9-9dde-7aedca0a081a">lost money</a> in 2017 and 2019 and warned a year ago that it would not make a profit for at least another two years because of Brexit and high fuel costs. Owner Richard Branson is now trying to put together private funding of around £450 million on the basis that he can then reapply for government assistance. He shouldn’t be given that assistance. In any case, it <a href="https://www.theguardian.com/business/2020/may/11/richard-branson-to-sell-500m-worth-of-virgin-galactic-shares">may be unnecessary</a> if he sells some of his other business interests. </p>
<p>One country that has some protection against zombie firms is Germany. Before a company can receive funding from state-owned German bank KfW, the authorities <a href="https://www.dertreasurer.de/news/finanzen-bilanzen/kfw-coronahilfen-die-4-wichtigsten-punkte-fuer-treasurer-2013021/">must be satisfied</a> that it was in solid shape before the crisis. This could be a useful model for other countries. </p>
<p>In short, the best way to help the economy is either to let zombie companies resurrect themselves through the bankruptcy process or just return to the grave. Yes, there will be economic pain if these companies fail – including job losses. But rather than providing government aid to these zombies, it might be better directed at their former employees. For example, the Swiss government <a href="https://www.swissinfo.ch/eng/covid-19_coronavirus--the-situation-in-switzerland/45592192">is putting</a> more money into unemployment insurance. Feeding zombies will just make the recovery longer and slower, crowding out more worthy enterprises and wasting resources.</p><img src="https://counter.theconversation.com/content/139177/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Earle is the owner of Alea IE, LLC, an economics consultancy firm in San Francisco.</span></em></p><p class="fine-print"><em><span>Jung Park and Karl Schmedders do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>They stumble around, baying for assistance, hoping to drink the lifeblood of other companies’ financial aid.Robert Earle, Lecturer in Management, University of ZurichJung Park, Research Fellow in Data Science, International Institute for Management Development (IMD)Karl Schmedders, Professor of Finance, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1375712020-05-13T12:38:21Z2020-05-13T12:38:21ZBankruptcy courts ill-prepared for tsunami of people going broke from coronavirus shutdown<figure><img src="https://images.theconversation.com/files/334524/original/file-20200512-82383-1fgwztt.jpg?ixlib=rb-1.1.0&rect=25%2C44%2C2092%2C1365&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The courts are sheltering in place too. </span> <span class="attribution"><span class="source">101cats/Getty Images</span></span></figcaption></figure><p>As more Americans <a href="https://www.cnn.com/2020/04/30/economy/unemployment-benefits-coronavirus/index.html">lose all or part of their incomes</a> and struggle with mounting debts, another crisis looms: a wave of personal bankruptcies. </p>
<p>Bankruptcy can discharge or erase many types of debts and stop foreclosures, repossessions and wage garnishments. But <a href="https://ssrn.com/abstract=3200042">our research shows</a> the bankruptcy system is difficult to navigate even in normal times, <a href="https://ssrn.com/abstract=2839060">particularly for minorities</a>, the <a href="https://ssrn.com/abstract=3226574">elderly</a> and those in <a href="https://ssrn.com/abstract=822811">rural areas</a>. </p>
<p>COVID-19 is exacerbating the existing challenges of accessing bankruptcy at a time when these vulnerable groups – who are bearing the brunt of both the <a href="https://www.bbc.com/future/article/20200420-coronavirus-why-some-racial-groups-are-more-vulnerable">economic</a> and <a href="https://www.usatoday.com/story/news/nation/2020/03/25/coronavirus-threatens-older-americans-rural-counties-across-us/2899675001/">health impact</a> of the coronavirus pandemic – may need its protections the most.</p>
<p>If Americans think about turning to bankruptcy for help, they will likely find a system that is ill-prepared for their arrival.</p>
<h2>It’s a hard road</h2>
<p>There are many benefits to filing bankruptcy.</p>
<p>For example, it can allow households to <a href="https://www.doi.org/10.1257/aer.20130612">avoid home foreclosure</a>, evictions and <a href="https://ssrn.com/abstract=3451565">car repossession</a>. The <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3451565">“automatic stay”</a> triggered at the start of the process immediately halts all debt collection efforts, garnishments and property seizures. And the process ends with a discharge of most unsecured debts, which sets people on a course to regain some financial stability.</p>
<p>The process helps the average household <a href="https://www.uscourts.gov/data-table-numbers/bapcpa-1x">erase approximately US$50,000</a> in unsecured debt – such as <a href="https://www.doi.org/10.1086/706201">payday loans</a> and <a href="https://www.doi.org/10.2105/AJPH.2018.304901">credit card and medical bills</a>.</p>
<p>We know from our empirical research, however, that filing for bankruptcy comes with costs. In a <a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics">Chapter 7 case</a>, known as a liquidation when a debtor’s property is sold and distributed to creditors, households may be required to <a href="https://ssrn.com/abstract=1471603">surrender some of their assets</a>. The post-bankruptcy path to financial stability <a href="https://ssrn.com/abstract=894453">is often bumpy</a>.</p>
<p>In a <a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics">Chapter 13 reorganization case</a>, households must commit to making monthly payments equal to their disposable income for three to five years. But the majority of people, unfortunately, are <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2925899">unable to keep up with their payments for that long</a> and do not end up eliminating their debts.</p>
<p>Monetary costs can also be substantial. <a href="https://ssrn.com/abstract=2925899">Attorney fees</a> average <a href="https://ssrn.com/abstract=3126901">$1,225 to $3,450</a>. Court fees are over <a href="https://www.cacb.uscourts.gov/filing-fees">$300</a>. And of course, there are also <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3126901">other downsides</a>, such as <a href="https://www.doi.org/10.1111/jels.12073">social stigma</a>, <a href="https://www.doi.org/10.1300/J134v11n04_02">negative credit</a> and <a href="https://www.nolo.com/legal-encyclopedia/will-bankruptcy-affect-my-job-future-employment.html">lower future earnings</a>.</p>
<h2>Pent-up demand</h2>
<p>Nonetheless, struggling Americans may find bankruptcy one of few viable options to address their worsening money problems, particularly as the <a href="https://www.nytimes.com/2020/05/10/health/coronavirus-plague-pandemic-history.html">pandemic shows no signs of ending</a> soon. </p>
<p>Yet, as a consequence of <a href="https://www.nytimes.com/interactive/2020/us/coronavirus-stay-at-home-order.html">nationwide shelter-in-place orders</a>, consumer bankruptcy filings have declined significantly in recent weeks. </p>
<p>In the last 10 days of March, when states began issuing such orders, we found that Chapter 13 filings fell 45% compared with the last 10 days of March 2019, based on a <a href="https://bloomberglaw.com/">docket search on Bloomberg Law</a>. Filings in all of April – when most states were under lockdown – plunged 60%, while Chapter 7 filings were down 40%.</p>
<p><iframe id="8KjkV" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/8KjkV/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>This suggests that there’s <a href="https://www.bloomberg.com/news/articles/2020-04-14/bankruptcy-courts-gear-up-dress-down-with-filings-surge-to-come">pent-up demand for bankruptcy protection</a> – in terms of what we’d normally expect – on top of the impact from the coronavirus recession.</p>
<p>The current <a href="https://www.nyeb.uscourts.gov/sites/nyeb/files/Clerks-Office-Operations-03-24-2020.pdf">limited physical access of many bankruptcy courts</a> presents additional problems, especially to already vulnerable groups. There is significant variation in how courts are handling the situation, but most require access to technology. This means that <a href="http://longbeachmc.org/for-minorities-the-digital-divide-is-growing-as-adoption-rates-increase-for-everyone-else/">ethnic and racial minorities</a>, <a href="https://www.pewresearch.org/internet/2017/05/17/technology-use-among-seniors/">seniors</a> and <a href="https://www.pewresearch.org/fact-tank/2019/05/31/digital-gap-between-rural-and-nonrural-america-persists/">people living in rural areas</a> face systemic barriers to filing because of their more limited access to transportation and technology.</p>
<p><a href="https://ssrn.com/abstract=3200042">Self-represented filers</a>, who navigate bankruptcy alone to avoid the hefty attorneys’ fees, face additional challenges and make up approximately <a href="https://www.uscourts.gov/statistics-reports/bapcpa-report-2019">9% of bankruptcy cases</a>. These filers typically have <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1867566">lower income and fewer assets</a> – and thus are less able to afford the <a href="https://ssrn.com/abstract=3200042">benefits of having an attorney</a> – and are <a href="https://projects.propublica.org/graphics/bankruptcy-data-analysis">more likely to be black</a>.</p>
<p>In <a href="http://www.ncmb.uscourts.gov/sites/default/files/public-files/covid19order.pdf">some</a> <a href="http://www.mab.uscourts.gov/pdfdocuments/masspsguide.pdf">districts</a>, only attorneys can file electronically, so people handling the process themselves must mail in their petition or find some other way of getting it to the courts, such as via physical drop boxes. </p>
<p>But such methods still assume access to technology. A computer, the internet and a printer are needed to access and print the petition. Libraries and other institutions that traditionally provide technology access for those who do not have it are, for the most part, <a href="https://www.nytimes.com/2020/04/14/arts/library-workers-us-coronavirus.html">closed</a>.</p>
<p><a href="http://www.ncmb.uscourts.gov/">Some courts</a> are allowing initial email submission of the petition from those without attorneys, but petitioners are still required to follow up by sending original documents via the mail or drop boxes. Access to a computer, the internet and a printer remains necessary.</p>
<p>Finally many states require “wet signatures” on bankruptcy petitions. That is, people have to sign their names in ink, as opposed to using an electronic signature. To smooth filings while courts are physically closed, several states have <a href="https://www.nolo.com/legal-updates/bankruptcy-procedures-change-due-to-coronavirus-outbreak.html">waived this requirement</a> for those using an attorney.</p>
<p>But even then, access issues still abound. People must first send their attorney the vast array of documents needed for filing – typically amounting to dozens of pages. Filers still need to be able to copy, scan and email documents. For those without computer access, they have to mail original documents, a somewhat <a href="https://www.macombdaily.com/news/coronavirus/covid-19-causing-some-postal-service-delays/article_1669e050-80bf-11ea-b84f-475aa3fb01e7.html">risky proposition</a> when important papers could get delayed, stolen or lost.</p>
<h2>A bad time to file</h2>
<p>In other words, the middle of a pandemic is not the best time to file for bankruptcy. </p>
<p>But with <a href="https://news.bloomberglaw.com/us-law-week/insight-the-cares-act-could-put-people-on-the-street-heres-a-solution">limited debt forbearances</a>, <a href="https://www.nytimes.com/2020/04/30/business/economy/coronavirus-unemployment-claims.html">over 30 million out of work</a> and <a href="https://www.nytimes.com/2020/04/17/nyregion/coronavirus-pandemic-unemployment-assistance-ny-delays.html">insufficient employment aid</a>, we expect to see a great deal more distress – both financial and <a href="https://www.vox.com/2020/5/11/21233063/food-banks-snap-coronavirus">otherwise</a> – in the coming months.</p>
<p>And without <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3588355">more aid</a> to individuals <a href="https://www.forbes.com/sites/jimwang/2020/05/08/2000-per-person-and-2000-per-child-monthly-economic-crisis-support-act-would-send-payments-to-over-90-of-americans/#62413b003977">soon</a>, U.S. bankruptcy courts will likely face a <a href="https://www.creditslips.org/creditslips/2020/04/a-coming-consumer-bankruptcy-tsunami-wave-or-ripple.html">tsunami of filings</a>, not only from average Americans but <a href="https://www.businessoffashion.com/articles/professional/coronavirus-bankruptcy">companies as well</a>. This will clog up the system, which is why <a href="https://www.dropbox.com/s/sf2daqrh8lr52we/Large%20Corporate%20Committee%20of%20Bankruptcy%20Scholars%20Letter%20to%20Congress%205.7.20.pdf?dl=0">many experts are calling on Congress</a> to shore up bankruptcy courts with more judges and funding. </p>
<p>But a first priority should be shoring up individuals, for whom bankruptcy is seen as a <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3126901">last resort</a>. If more aid isn’t forthcoming, the bankruptcy system may be too overwhelmed to handle even that. </p>
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<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The bankruptcy system has always been difficult to navigate, especially for minorities and other vulnerable groups. The pandemic is making it a lot harder.Paige Marta Skiba, Economist, Professor of Law, Vanderbilt UniversityDalié Jiménez, Professor of Law, University of California, IrvineMichelle McKinnon Miller, Associate Professor of Economics, Loyola Marymount UniversityPamela Foohey, Associate Professor of Law, Indiana UniversitySara Sternberg Greene, Professor of Law, Duke UniversityLicensed as Creative Commons – attribution, no derivatives.