Given his recent run of success on the football field, there has been renewed discussion of Michael Vick, his prior actions, the value of second chances, redemption and What It All Means.
This article isn’t about any of those things. Instead, this is about one of the few things Mr. Vick and most of us have in common: money and debt (I am assuming very few of you reading this article have careers in professional sports, millions in assets, or federal felony convictions.)
Michael Vick is in the last year of his playing contract, but is only one year or so into a five year Chapter 11 Bankruptcy Reorganization Plan.
A Chapter 11 has the effect of grouping together creditors and treating them all in a similar manner, allowing for the debtor in the case to continue making income or doing business without lawsuits, garnishments or other collection activity. It is the type of bankruptcy that larger businesses use (think GM, Chrysler, pick an airline), as well as individuals with many assets and large debts (Mike Tyson, Vick). This plan requires him to pay some of his income into a “Liquidating Trust” that then pays out money to his creditors. In structure it is fundamentally similar to a Chapter 13 Bankruptcy, for which most consumer debtors (people like you and me) would be eligible.
In a Chapter 13 Bankruptcy, a person (or couple) makes payments to a Chapter 13 Trustee, and the money is then paid out to their creditors according to the terms of the bankruptcy plan. If the debtor’s income changes, whether an increase or decrease, the terms of repayment may also have to change – if you make more, you pay more to your creditors; if you make less, you pay less (within certain limits).
I was curious what provisions Mr. Vick’s plan made for his future contracts, and how, if at all, it would change based on what he made. It turns out his plan is well thought out on this front (those millions in legal fees haven’t gone to waste), and provides for an increasing percentage of income to be paid to creditors as his income increases (much like how your taxes are calculated), maxing out at 40 percent of all income over $10 million per year is to be paid until the end of 2014, or 100 percent of claims are paid.
There are some provisions to ensure extra income is paid if he hasn’t met 80 percent of the claims by 2014. Since Chapter 11 cases essentially end when the plan is confirmed by the court and not when payments are completed, it must include some provision to account for changes in income. By contrast, Chapter 13 cases don’t end until the last payment is made, and are thus reviewable by the court in the event of a change in circumstance.
In both cases, there is provision in place to adjust how creditors are treated in the event the financial situation changes for the individual. When dealing with your creditors (hopefully outside the confines of a bankruptcy), you need a plan that does the same.
First, you should have a plan in place to reduce or eliminate your consumer debts (credit cards, medical bills and the like), making sure the plan categorizes and prioritizes the debts (there are many methods, like Dave Ramsey’s or Suze Orman’s.) Second, you need to be willing to reexamine the plan when your situation changes, perhaps after your annual pay review, or in the event of a child being born or going to college, making changes to account for your current economic reality. Finally, and most importantly, you need to have the will to stick to the plan, even when it ceases to be fun.
It took a felony conviction, complete public disgrace, and a Chapter 11 bankruptcy to get Michael Vick on sound financial footing with a plan for recovery.
If you start with a plan to manage and eliminate debt, you can hopefully avoid a similar financial fate. Feel free to skip the felony and disgrace parts as well.
