Tom Petters, a former Minnesota business mogul, is serving a fifty-year jail term for twenty counts of fraud relating to his $3.65 billion Ponzi scheme. A Ponzi scheme is run by promising high returns to new investors in order to convince them to invest while using the investment money to pay off older investors who ask to cash out their investments. Ponzi schemes become more expensive to run as the number of investors grows. Like most Ponzi schemes, Petters’s scheme collapsed when he could not raise enough money from new investors to cash out his older investors.

Because Petters is now bankrupt, anyone wishing to recover money from him in order to recoup their losses from investing in his Ponzi scheme will have to sue someone else. As a result, many of Petters’s relatives, officers and close friends are now being sued for millions of dollars each. These lawsuits, in which someone other than the perpetrator of a financial crime is sued, are referred to as “clawback lawsuits” because the plaintiffs attempt to “claw back” profits from parties who benefited unjustly from the crime.

One notable clawback defendant is Dean Vlahos, a successful MN restaurateur who manages Champps, a chain of sports bars; Redstone, a more upscale dining chain; and BLVD, a Minnetonka bistro, and then lost $26 million to Petters. Vlahos invested $16 million with Petters in 2001 and eventually loaned Petters an additional $10 million in 2007. Petters and Vlahos had been very close friends, sharing in each other’s travels, holidays and family affairs. Vlahos thus never suspected that his $16 million “investment” and $10 million “loan” were actually being used to pay off investors who had asked to cash out their investments in Petters’s Ponzi scheme. Petters had told Vlahos that he was investing in a consumer electronics resale business that would yield thirty-six percent returns but in fact, Petters was not involved in any such resale business. Within two years of loaning $10 million to his trusted friend, Vlahos was testifying in Petters’s fraud trial. Three years later, Vlahos is filing for Chapter 7 bankruptcy.

Vlahos still has lucrative business positions (for example, he earns six figures per year from restaurant management) but he will need additional revenue if he ever hopes to pay off his Petters-induced debts and losses for, despite Vlahos’s above-average income, his debts dwarf his assets. After the $39 million clawback lawsuit, Vlahos’s top creditor is Home Federal Savings Bank of Rochester, to which Vlahos owes $7.6 million. He also owes so much money in federal and state back taxes that the IRS and the MN Dept. of Revenue have seized control of a handful of his bank accounts. He hopes that bankruptcy will help him to erase some of his debts and start anew.

Former NFL defensive lineman Warren Sapp recently filed for Chapter 7 bankruptcy in Florida. Chapter 7 bankruptcy is also called liquidation bankruptcy because most of the debtor’s assets are liquidated (i.e., sold by the bankruptcy trustee) and the proceeds are used to pay off creditors. Certain categories of property are exempt from liquidation so that the debtor is not left penniless. According to Sapp’s bankruptcy filings, Sapp has $6.45 million in assets and reportedly owes almost $7 million to a variety of creditors. A noticeable portion of this debt is due to unpaid child support and alimony obligations.

With a past NFL salary in the millions and an annual retirement income of more than $1 million (Sapp currently works as a sports commentator and writer), how did Sapp manage to live above his means? Like many professional athletes who have found themselves in the poorhouse, Sapp spent a lot of money on luxury items and did not keep up with his domestic support obligations. For example, he owns a $2,250 watch and approximately $6,500 in name-brand sneakers.

Sapp is not an exceptional case; he is but one example of a widespread problem in the professional sports arena. As reported by Sports Illustrated, 78% of NFL players find themselves in dire financial straights in the first two years of their retirements. Similarly, 60% of NBA players run out of money within five years of retirement. In an effort to lower these figures, the NFL provides its new hires with financial management training. However, the training does not appear to be alleviating the epidemic of once-rich professional athletes going broke. To name a few, Terrell OwensDennis Rodman, Deuce McAllister and Allen Iverson have all recently gone broke despite having earned millions of dollars per year as professional athletes. Other athletes’ financial troubles appear to be linked to criminal activity. For example, Lenny Dykstra, Mike Tyson and Marion Jones all served jail time and lost most of their riches. Sapp himself does not have much of a record. He was arrested for an alleged domestic battery charge but was never prosecuted in court due to consistency issues with the victim’s testimony.

In addition to legal troubles, extravagant purchases and domestic support obligations, many athletes have lost money as a result of not managing their investments well. For example, Raghib “Rocket” Ismail, who was the top NFL pick out of college but instead signed with the CFL, lost his riches due to failed investments in a cosmetic procedure, a restaurant chain, memorabilia stores and a record label.

Former TLC member Tionne Watkins, who goes by the stage name “T-Boz,” has filed for bankruptcy again. Her first filing this year was in a Georgia court in February but her petition was not approved. Hoping for a different outcome this time, Watkins is filing for Chapter 13 bankruptcy again, citing a large mortgage, insufficient income and unpaid child support as her primary debt burdens. She reportedly owes her creditors hundreds of thousands of dollars.

In Chapter 13 bankruptcy, the court consolidates the debtor’s debts and orders monthly payments, which usually continue for three to five years. During this time, the debtor can continue to collect any regular sources of income and can keep property (e.g., houses and cars). For this reason, Chapter 13 bankruptcy is more colloquially known as a “wage earner’s plan.”

Many of Watkins’s fans were surprised by the severity of her financial troubles, given her successful musical career. Watkins won four Grammy Awards and had four multi-platinum albums (i.e., albums selling at least two million copies each), four number one hits and ten top ten singles. However, Watkins’s financial situation is somewhat surprising. For example, she apparently brings in less than $300 per week in royalties. Her total income is still significantly above average at $11,700 per month but Watkins reports her expenses to be more than $8,000 per month, and so she does not get to keep most of her income.

In addition to incurring monthly mortgage payments on her $1.2 million house, Watkins is supporting her daughter, Chase Anela, on her own because Chase’s father, rapper Mack 10, is reportedly delinquent on $250,000 in child support. Watkins and Mack 10 were married in 2000 but Watkins filed for divorce in 2004 citing adultery and death threats as her primary motivations. In addition, Watkins may have high medical expenses, as she has sickle cell anemia (a chronic blood disorder) and has also battled swine flu and a brain tumor in recent years.

T-Boz isn’t the only celebrity in the red these days. Sports stars Michael Vick and Ray Guy filed for bankruptcy this year and singer Toni Braxton filed last year. Vick’s bankruptcy was especially surprising, given that he earned over $11 million in just three months this year. Guy had to sell off three of his super bowl rings (for which he received over $80,000) and Braxton reported debts totaling $10 million to $50 million.

A recent appellate panel decision in the U.S. Court of Appeals for the Eighth Circuit held that second mortgages do not need to be taken into account when considering debts in Chapter 13 bankruptcy proceedings. The case involved a Cottage Grove, MN man but the ramifications of the case extend well beyond the borders of Minn. The Eighth Circuit has jurisdiction over Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota, and so this case has become precedent in those states.

Chapter 13 bankruptcy is also known as a “wage earner’s plan” because it allows the debtor to continue to receive his or her regular sources of income and to keep property while paying off his or her debt. Chapter 13 bankruptcy consists of consolidating the debtor’s liabilities and coming up with a manageable monthly payment plan which typically lasts for three to five years. With certain exceptions (e.g., for people who did not show up to their prior bankruptcy proceedings), individuals are eligible to file for Chapter 13 bankruptcy if their combined unsecured debts total less than $360,475 and their secured debts are under $1,081,400. Self-employed individuals, or sole proprietors, may file for Chapter 13 bankruptcy but businesses such as corporations and partnerships are not eligible to file for Chapter 13 bankruptcy even if they meet the debt ceilings outlined above.

The case at issue involved a debtor by the name of Michael Fisette, who filed for Chapter 13 bankruptcy last year. Fisette’s attorney, Craig Andresen, moved to strip Fisette’s second mortgage (which accounted for the bulk of his debt) from his bankruptcy balance sheet. The bank holding Fisette’s second mortgage did not object to Andresen’s filing; however, the judge did. When the case went up for appeal, the appellate panel reversed, stating that second mortgages can in fact be removed from a debtor’s balance sheet.

The appellate panel’s decision is itself being appealed and will soon be heard by the full Eighth Circuit Court of Appeals. However, bankruptcy attorneys in MN are generally not worried about the outcome, as other circuits have strong precedent indicating that second and third mortgages may be disregarded in bankruptcy calculations. The Eighth Circuit did not have a similar line of appellate precedent simply because the issue had never gone up to the appellate level in the Eighth Circuit, not because there was a line of appellate precedent to the contrary.

President Obama has ruffled quite a few feathers with his proposed legislation allowing debt collection companies to make more phone calls to indebted consumers’ cell phones for debts owed to the federal government. Private debt collectors would not be able to place such calls in order to collect privately held debt.

Current federal law allows debt collection agencies to use “robo-calls,” i.e. automatic dialing, to consumers’ landlines in addition to making some manually dialed calls to cell phones. Robo-calling consumers’ cell phones, however, is generally not permitted.

The rationale behind Obama’s proposed legislation is that, in light of our large national debt, the government needs to collect more money and is being hindered by the fact that many delinquent consumers do not have land lines. In fact, the proposed legislation is part of Obama’s $3 trillion plan to reduce the national debt. Because of the large fees collected by debt collection agencies, even more money needs to be collected in order to refill the depleted coffers of federal agencies.

While many in the debt collection industry favor the proposed legislation, quite a few Democrats are upset over the legislation because they fear that it would lead to harassing phone calls to consumers. In addition, consumer groups argue that additional calls wouldn’t help if the consumers simply don’t have enough money to pay back their debts. These groups appear to have a point, as the U.S. Department of Education is owed significantly more money than any other government agency is. Much of this money is due to student loans that have gone unpaid by people who graduated without a job and remain unemployed.

Obama is taking quite a risk by proposing this unpopular legislation at a time when he is putting together his reelection campaign plans. With the economy being what it is, many voters are more sympathetic than they usually would be to people who have not paid back their debts in a timely manner. However, other features of Obama’s debt reduction plan, including higher taxes on the wealthy and corporations, may placate these voters. Interestingly, Obama’s plan does not include the changes to Social Security and Medicare that some analysts had predicted.

International Rarities Corporation (“IRC”), a Minneapolis coin dealer with a nationwide customer base, filed for Chapter 11 bankruptcy in mid-August. It reported assets and liabilities of approximately $1.5 million and $3 million, respectively. IRC’s creditors are primarily customers who paid for coins but did not receive them and investors who backed IRC’s sister company, International Rarities Holdings Inc. (“IRH”). Investors sent money to IRH based on the company’s promise of going public, i.e. joining the stock exchange, which would have resulted in investment returns. However, IRH did not end up going public. As for those customers hoping to recover money after IRC sells its remaining coins, IRC has already sold its inventory.

IRC’s profits are down significantly from last year. This is surprising given the recent increase in demand for gold and other precious metals due to the fact that they have vastly outperformed traditional investments like stocks and treasury bonds since the recession hit. IRC’s woes are therefore most likely due to its recent legal troubles rather than to a supply and demand issue.

IRC is being sued for fraud by a senior citizen in Florida. In addition, the Minn. attorney general’s office is investigating IRC for consumer fraud. The Florida plaintiff, Dean Dellinger, claims that he was scammed out of hundreds of thousands of dollars in IRC gold and silver trades. Dellinger’s attorney noted that IRC’s filing for bankruptcy might delay Dellinger’s case against IRC but it would not allow the company to avoid it. In a related suit filed in August 2011, Barbara Shannon, a retired senior citizen in West Virginia, claims that one of IRC’s former salesman cheated her out of money on precious metal trades and then took IRC’s files on Shannon when he left IRC.

In response to these allegations, the Star Tribune investigated IRC and its competitors. The Minneapolis newspaper found that IRC and other Twin Cities precious metal firms hired salesmen with criminal records, some of which included coin fraud. IRC alone has hired over twenty ex-cons. Most of their records consist of substance abuse, such as drunk driving, and financial crimes, such as fraud and forgery.

IRC appears to be making significant organizational changes, though it is unclear whether these personnel changes will have any real effect on how the company operates. According to IRC’s bankruptcy petition, its president/CEO and COO (chief operating officer) resigned in July. IRC claims that it will pay back all of its debts if its bankruptcy petition is approved but given its alleged track record of dishonest dealings, many of its creditors are less than optimistic about this promise.

Minnesota real estate mogul Steve Hoyt filed for Chapter 11 bankruptcy in late May. Hoyt is the CEO of Hoyt Properties, which operates out of Minneapolis. Hoyt listed assets of slightly over $30 million and debts of $54 million in his bankruptcy petition. When considering the magnitude of these numbers, the shocker is that the bankruptcy petition was for personal bankruptcy, not a corporate bankruptcy of Hoyt Properties. Thus, those dollar amounts reflect personal assets and liabilities.

Despite the recent downturn in the housing market, real estate is generally a lucrative business. As CEO of a major real estate development firm, Hoyt has been able to rack up quite an impressive amount of assets over the years — so much so that he makes enough in interest and dividends in one month for an average person to live off of for a year. Hoyt was making around $45,000 per month and most of this was passive income (investment income is considered passive, while money made at work is called earned income).

So if Hoyt has so much money, how could he possibly owe almost double that amount to his creditors? Basically, Hoyt used his assets (stock, etc.) as collateral for very large loans, which he did not fully pay back on time. As certain areas of his business investments went south, Hoyt took out more loans to refinance the original loans, just as some consumers attempt to use new lines of credit to manage their existing credit card debt. As is the case with many credit card holders, this tactic did not turn out well for Hoyt. Hoyt’s creditors now have the right to foreclose on his collateral. His main creditors are local banks, followed by private MN investors such as local businesses. Michael Meyer, Hoyt’s attorney, stated that Hoyt’s bankruptcy will allow him to protect some of his assets from these creditors (i.e. delay or prevent foreclosure) and to reorganize his liabilities.

Hoyt’s Chapter 11 petition alleged that the banks are acting in a heavy-handed manner because of all of the negative press and government scrutiny that they have received due to their poor lending policies. Hoyt’s allegation may appear to hold water with regard to some of the banks involved but it does not explain the actions of other banks. For example, American Bank of Saint Paul, MN and First Commercial Bank of Bloomington, MN were found to be in violation of banking regulations in 2009. In contrast, Commerce Bank has not been similarly sanctioned. Thus, it appears that Hoyt’s failure to pay back his loans on time is the root cause of his current situation.

The U.S. Postal Service, or USPS for short, provides a vital service to Americans at a relatively low cost. Despite the fact that stamp prices generally increase every few years, the cost of mailing a letter is still small when you consider the costs of delivering it. The USPS was previously able to remain profitable because of the sheer volume of mail that it delivered. However, nowadays mail volume is down significantly and the Postal Service is strapped for cash.

Other mailing options, such as Parcel Post for packages, have rates that vary depending on how far the package is delivered from its origin. In contrast, a first-class letter can be mailed for the same price regardless of where in the United States it is going. For example, letters can be mailed to the far reaches of Alaska or to rural homes at the end of dirt roads, all for 44 cents. And mailing a postcard is even cheaper. Think how much it would cost you if you had to deliver such mail yourself. Perhaps this is the reason that commercial mailing services such as FedEx and UPS tend to have competitive rates for packages and large envelopes but not for letters or postcards.

So, if the USPS has no real competitors for delivering letters and postcards, why is the Postal Service suffering so much? The main answer is that the volume of mail has decreased drastically. The primary reason for this is the rise of e-mail and online accounts such as online banking. When a customer signs up for paperless bank statements, the bank no longer has to spend postage mailing that person monthly statements. When you want to write a note to your friend, you most likely use e-mail much more often than physical mail.

A secondary but significant reason for the decline in mail volume is the recession. Before the credit crunch, many people were being bombarded with credit card offers and the like. That is no longer as prevalent. In addition, as businesses cut their workforces, they now have fewer employees to whom they have to mail items such as W-2s. Declining business operations also mean less mail. For example, if a vendor gets hired by 100 buyers instead of 150 buyers, that vendor will mail 100 contracts instead of 150 contracts. When the work has been completed, the vendor will mail 100 bills rather than 150 bills. Multiply this by the number of companies that are not doing as much business as they usually do and it is easy to see how the USPS is being hit harder than many private businesses are.

Joint restaurant company Perkins & Marie Callender’s, along with eleven of its subsidiaries, filed for Chapter 11 bankruptcy on June 13, 2011 in the United States Bankruptcy Court for the District of Delaware. While Perkins and Marie Callender’s operate as independent restaurant chains, they are owned by the same parent company. The company, which runs 76 Perkins restaurants in MN, claimed $290 million in assets and $441 million in debt. The company’s loan default began when it missed an interest payment of $9.5 million on April 1.

Originally, the two companies were separate, with Marie Callender’s opening in 1948 and Perkins Restaurants opening ten years later. Five years ago, the two restaurant companies were merged. The joint company now has hundreds of Perkins restaurants in the U.S. and Canada, along with dozens of Marie Callender’s restaurants in America and Mexico. In addition, it owns baked goods manufacturer Foxtail Foods, which produces dessert items for the company’s locations and also sells its products to other restaurants.

A spokesperson for Perkins attributed the company’s financial ruin to the declining economy. Both restaurant chains are concentrated in areas suffering the most from the real estate crash. More specifically, Perkins has a strong presence in California, Nevada and Florida, while Marie Callender’s is concentrated in the Southwest and California. Having a disproportionately large number of locations in financially distressed states meant that its customers were unable to continue their pre-recession levels of patronage. This in turn caused the company to lack the requisite amount of capital to improve its restaurants or open new locations, which led it to be out-competed by other chains.

As part of its Chapter 11 restructuring, 65 Perkins and Marie Callender’s restaurants (only one of which, the 6023 Nicollet Avenue, Minneapolis branch, is located in Minnesota) will be closed. This amounts to laying off approximately one fifth of the company’s workforce. The company will continue to operate the rest of its locations using its remaining assets in addition to $21 million in financing from Wells Fargo. The restructuring will also require the company to draft a plan of reorganization by July 14. The restructuring is scheduled to be finished by October 21 of this year. After the restructuring process has been completed, most of the company will be controlled by private investment funds under the auspices of the Minnesota-based firm Wayzata Investment Partners.

Automobile giant Chrysler has paid back the billions of dollars that were loaned to it during the economic bailout of 2009. The bailout money, with interest, amounts to approximately $7 billion, most of which came from the American government and the remainder of which came from the Canadian government. Chrysler, however, has not yet repaid the almost $4 billion loaned to it by the U.S. federal government shortly before the bailout. Still, Chrysler’s complete repayment of its bailout loan has sparked much conversation about economic bailouts.

Many Democrats are using Chrysler’s milestone repayment as evidence that the bailout is a sound economic policy that should remain on the table for future recessions. They note that Detroit’s economy would have been much worse off had Chrysler not rebounded from its financial woes. Moreover, Chrysler was able to repay its bailout loan six years earlier than anticipated, which would indicate that the bailout may have jumpstarted the company’s recovery.

Many Republicans, in contrast, argue that future bailouts should be avoided in order to protect taxpayers. For example, even after taking into account the interest paid to the U.S. government and the anticipated revenue from the government’s selling its final 6.6 percent ownership of the company, Chrysler’s repayment is still not sufficient to fully repay taxpayers for their earlier loans to the struggling company. Moreover, even if Chrysler does pay back its earlier loans, that would still not account for all of the money given to the company in the form of subsidies.

In addition, some Republicans argue that future bailouts should be avoided in order to preserve the American capitalist system, which relies on competition, survival of the fittest and separation between the government and the private sector. If failing companies are constantly being bailed out by the government, competition in the free market will no longer control which companies succeed and which companies fail.

On a related note, some pundits argue that Chrysler is back on its financial feet because of its 2009 bankruptcy and restructuring, as opposed to the bailout itself. By going bankrupt, Chrysler was able to avoid paying back some of its debts. Bankruptcy, in effect, allowed the company to pay back the debts that it could and then “reset” its accounts to zero dollars as opposed to carrying forward a negative balance from its remaining unpaid debts. This avoidance helped the company to swing back from red to black (i.e. owing money to making money) much more quickly than it would have been able to absent declaring bankruptcy.