Personal Bankruptcy and Brokers

When most residents of Chicagoland hear the words personal bankruptcy or consumer bankruptcy, we think about how filing for Chapter 7 or Chapter 13 bankruptcy protection might be able to help us handle seemingly unmanageable debt. But in some instances, personal bankruptcy can be a way to avoid paying out certain types of awards or monies owed. According to a recent article in The Wall Street Journal, when a broker files for personal bankruptcy, it is unlikely that she or he will be held responsible for paying an arbitration award.
Learning More About Arbitration and Brokerage Firm Employees
Generally speaking, when brokerage firms and brokers are required to pay arbitration awards, they can actually “be booted from the industry” if they fail to pay those awards on time, according to the article. The Financial Industry Regulation Authority (FINRA) is a Wall Street watchdog that seeks to “take tough action to ensure awards to investors made under its arbitration program are actually paid.”

However, as the article underscores, there is one major exception when it comes to requiring brokers to make good on arbitration debts. When a broker files for personal bankruptcy, she or he typically receives protection not only from creditors trying to recoup personal debts, but also from actions aimed at forcing that broker to pay an arbitration award.
To get a better sense of how these arbitration awards are decided and why brokers can seek protection by filing for personal bankruptcy, we should take a closer look at FINRA’s website. In general, FINRA arbitration is an alternative way to settle disputes that does not involve mediation or litigation. In disputes between brokers (or brokerage firms) and investors, claims must be filed within six years from the date of the initial event that led to the dispute. In some situations (depending on a number of different factors), some brokers and investors must arbitrate at FINRA. A panel of three arbitrators is convened, and the panel’s ultimate decision is called an “arbitration award.” It is final, and it is binding on the broker and the investor.
Arbitration Awards May Be Treated as Dischargeable Debts
Now that you have a better sense of what FINRA arbitration entails, we would like to present you with a hypothetical situation: an investor and a broker enter arbitration, and the panel awards $10 million to the investor. After the arbitration, the broker files for personal bankruptcy. According to the article in The Wall Street Journal, when an individual broker (and in some cases even a brokerage firm) declares bankruptcy, “the regulator is legally obligated to comply with the associated court’s order discharging the debt, in this case, the arbitration award.
In other words, if a bankruptcy court says the arbitration award is dischargeable debt, the investor will not be able to collect the money owed from that arbitration award. According to data from FINRA, about 15% of all arbitration awards (more than $34 million) remains unpaid, and personal bankruptcy may be at the root of that figure.
Personal bankruptcy can help many different Chicagoans in widely varying circumstances. However, it is important to keep in mind that bankruptcy laws are extremely complex, and you should always seek advice from an experienced Oak Park bankruptcy lawyer. An advocate at the Emerson Law Firm can answer your questions today. Contact us for more information.
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