Asian Journal- The Filipino-American Community Newspaper

ASIA’S largest carrier by revenue, Japan Airlines filed for bankruptcy reorganization two days ago. Japanese companies are not immune to the debilitating effect of too much debt on profitability. Japan Airlines owed more than $25 billion in debt. The Japanese government will give the bankrupt airline $11 billion to help it through its reorganization. It plans to terminate about 16,000 employees and will junk unprofitable routes as part of it’s restructuring plan to survive in business in the future. The board of directors and management will also be replaced. As in most business bankruptcies, shareholders of the airline will be wiped out, and unsecured creditors, particularly bondholders, those who bought IOU’s of the airline will be holding promissory notes that are practically worthless. It is estimated that bondholders may end up getting less than 10 cents to a dollar. To illustrate, if you lent JAL $100,000 against it’s promissory note promising to pay you 10% annual interest, after JAL’s bankruptcy, thinking that you were lucky to not lose 30% or $30,000 of your money had you invested in the stock market in 2008 and were looking forward to get back your capital of $100,000 back from JAL plus two year’s interest of $20,000, you might have to consider ‘Hara Kiri.’ Japanese suicide, when you get the order from bankruptcy court saying that the resultant new entity coming out of bankruptcy will pay you back only $7,500 out of your claim of $120,000.

Secured creditors holding real estate or who have liens on planes don’t have to worry too much. They have recourse against the collateral by getting the collateral back if they are not happy with the proposed bankruptcy reorganization plan. In any event, the plan must provide payment to secured creditors to the extent of the secured claims. Thus, secured creditors are in a totally privileged class when compared to unsecured creditors. JAL has to play ball with secured creditors to get the reorganization through bankruptcy court. But JAL’s reorganization plan can propose to pay nothing or a very small percentage to unsecured creditors and get away with it. At this point in time, the bankrupt JAL is worth less than a Boeing 747 at $150 million. It’s difficult to imagine that the flagship of the Japanese economic juggernaut is bankrupt. But just like GM & Chrysler even if a large established business has billions of revenues, too much debt will wipe out profits and kill the business. Very large Japanese businesses, which appear to be invincible, are no exception to the rule. The sun also sets if there is too much debt.

With $25 billion of debt, interest at 10% annually is $2.5 billion. Even if JAL made a profit of $1.0 billion before interest payment, it would still lose $1.5 billion yearly because of interest payment. That’s a deficit of $100 million/month or more than $3million everyday! The airline is bleeding to death. Fortunately for JAL, it can go through bankruptcy court and emerge as a new entity doing the same business without accumulated debt. This is exactly the same route that GM & Chrysler took. Now, both companies think that they will be profitable this year.

On a personal level, if you have too much accumulated debt, there is no need to commit ‘Hara Kiri.’ For instance, if your net income is $4,000 and your household expenses is at least $4,000 but you owe $50,000 of credit card debt, you have no income left to cover minimum payments of $1,500 monthly. Even if you do get a 2nd job of $1,500, you will not be productive because you will be working a 2nd job just to keep your $50,000 of credit cards current. After working 12 months at a 2nd job and paying $18,000 to your credit card masters, you still owe the same $50,000. If this is your situation, consider a Chapter 7 bankruptcy to wipe out all of your credit card debt to save the money from your 2nd job.

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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.