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Why did Lenny Dykstra file for Chapter 11?

LDykstraYou’ve probably heard by now that former New York Met star Lenny Dykstra (aka “Nails”) filed for Chapter 11 bankruptcy and all about his financial woes stemming from litigation, divorce, foreclosure, etc.

But why Chapter 11?  Isn’t Chapter 11 bankruptcy for companies?  And don’t individuals usually file for Chapter 7 liquidation?  Or maybe for Chapter 13 (repayment plan) if their income is above the median income for their state (aka the “means test”)?

What makes Lenny Dykstra so special that he filed for Chapter 11 (other than the fact that he was once the runner-up to Barry Bonds in MVP voting and also in the business of giving financial advice to other athletes)?

Individuals can in fact file for Chapter 11 bankruptcy.  In Lenny Dykstra’s case, it’s a good example a situation where it may make sense for an individual to file for Chapter 11 and highlights some of the advantages of doing so.

The primary reason for filing for Chapter 11 is that he has business interests that he wants to protect and continue to operate.  In particular, he apparently plans to continue the launch of Player’s Club, a monthly magazine for professional athletes.  He said in a recent CNBC interview that  his Chapter 11 bankruptcy is about “reorganization, not bankruptcy.  I’m not bankrupt.”  In a Chapter 7 liquidation, by contrast, all of his assets would simply be liquidated and sold off to pay of his creditors.  In exchange he would receive a clean slate following a Chapter 7 bankruptcy filing.

Chapter 7 would have also required the appointment of a trustee.  (Chapter 11 does not have such a requirement.)  And investigation of Dykstra’s finances by a trustee may have proved embarrassing.  This was more than likely a strong incentive for avoiding Chapter 7 on Dykstra’s part, particularly given the fact that this past April he told ESPN that he had $60 million in assets.

What about the means test under the 2005 bankruptcy laws?  Would Dykstra have been eligible to file for Chapter 7?  Yes, most likely he would have been eligible.  Most of his debts were business debts, not consumer debts.  The means test only applies to individuals whose debts are primarily (i.e., over 50%) consumer debts as opposed to business debts.

And what about Chapter 13?  Would that have been an option for Dykstra?  No, it appears from his bankruptcy filing that he would not have been eligible to file for Chapter 13, even if wanted to.  An individual with both consumer and business debts is permitted to file for Chapter 13.  However, under Chapter 13, the allowable debt limits are a little over $300K for unsecured debt and a little over $1 million for secured debts.  If a debtor is over the limit in either category, then he or she is not eligible to file for Chapter 13.  In Dykstra’s case, his bankruptcy petition listed his liabilities in a range of $10 million to $50 million, well over the limit.

It’s always disconcerting to see people who may be our heroes in one arena struggle and fail in other parts of life.  But the reality is that financial management is not easy, especially in this day and age.  That’s why we’re fortunate that the U.S. legal system in the U.S. bankruptcy as an option and as a social safety net that enables risk-taking and innovation.

If you are facing financial hardship in New York and feel like you’re caught in a run-down, you do have options.  Please contact me for a free initial consultation to discuss your situation and learn more about bankruptcy in New York as well as other options.

1 comment to Why did Lenny Dykstra file for Chapter 11?

  • LDKempl

    Lenny is not bankrupt because he is a struggling hero. He’s facing bankruptcy because he is a thief. He steals from struggling individuals – borrows or cons them out of money with no intention of paying them back. Swipes cash from loans intended for other purposes. Charges peoples’ credit cards without their authorization. Steals from his son’s bank account. All for what? Flying private planes back and forth to NYC, fancy hotel rooms and luxury limos. It’s all a show. The Maybach, the Rolls, the plane. He. Is. Broke. Has been for a long time, and has no means to restart these business he claims. I wish Hackett a lot of luck. Lenny pays the attorney their retainer, but blows through it and then they sue him (Petrocelli, K&L Gates). A forensic accounting of his financials would land him in jail, no question.