ADVANTA BANK CORPORATION, one of the country’s largest issuers of credit cards for small businesses, filed for Chapter 11 bankruptcy last month. Many small business owners have ADVANTA credit cards for $25,000 that they use to supplement operating capital. It is standard procedure for ADVANTA to have the business owner sign a personal guaranty as an individual even though the credit line is given to the business and is intended for business use.
ADVANTA obtained cash from individuals by giving lenders IOU’s that stipulated high interest. To illustrate, ADVANTA regularly solicited loans from the public through ads in the LA Times by offering to pay between 8% to 12% of interest payable monthly for placements between 3 months to 5 years for unsecured loans. Many people with spare cash who were afraid to invest in the stock market but were not happy with low CD rates of 1% to 1.5% p.a. were seduced by the high interest offers of ADVANTA. Motivated by greed and given the false security of dealing with an established company like ADVANTA which had been in business for 50 years, many individuals lent their life savings to ADVANTA expecting 8% to 12% p.a. of interest on their savings. Unbeknownst to the gullible public, ADVANTA was being taken to the showers by a deluge of small business owners who were being shuttered by the current recession, which has gone on for nearly 2 years. By May of 2009, bad debts of ADVANTA were more than half of its portfolio. That month, ADVANTA stopped issuing credit cards and barred its existing 360,000 customers from making new charges.
For many small business owners who depended on ADVANTA’S credit line to continue operating, the inability to make new charges on their ADVANTA credit card was a fatal blow that resulted in the closure of the business. Overhead and payroll could not be paid.
Unfortunately, small businesses are not like GM, Chrysler, and AIG, which Obama has deemed too big to fail. Small business owners can only depend on their wits and credit lines to continue doing business. Unlike the State of California, small business owners cannot issue IOU’s for money owed. Creditors demand immediate payment once the account is due or they will unleash their legal hounds on you. Most small business owners are not able to access SBA loans to tide them over this recession even though the Administration touts the SBA as the backbone of small business.
On the date of filing its bankruptcy, ADVANTA had assets of $3.1 billion against liabilities of $3 billion. It had $100 million in cash and cash equivalents but liquid assets were not enough to pay for its obligations much longer, a company statement said. We can surmise that a big chunk of the $3.1 billion is money owed on notes to the public who were enticed by the ads offering high interest. The fact that a business has been around for a long time is no longer a guarantee that it will continue operating in the future. The straw that breaks the business has always been and will always be too much debt. If ADVANTA did less business with no debt, it would probably survive the recession. Without debt, laying off half of its workforce, which ADVANTA did in June of 2009, may have been enough to put it back to profitability. But with $3 billion of debt, there is no way ADVANTA can survive without going through a bankruptcy. The resultant entity that emerges from bankruptcy court will probably have no debt with lenders agreeing to convert loans to the old ADVANTA to equity in the new ADVANTA thus giving the new ADVANTA better access to profits in the future.
If you have too much debt, consider a bankruptcy to become productive again. The purpose of bankruptcy is giving you a new start without debt while allowing you to keep most if not all of your assets. This is a good law.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.
( Published January 9, 2010 in Asian Journal Los Angeles p. C4 )
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