Airline Ticket Holders Are Unsecured Creditors In Bankruptcy

June 18, 2008 11:52 am Published by

With no fewer than twenty four airlines having stopped service or actually having filed bankruptcy in just the past six months, the question on many minds has to be “So what about my frequent flier miles?”  Although, as a bankruptcy lawyer in Indiana, I’ve handled filings for tens of thousands of individuals and companies, none of them has been an airline.  Still, having practiced bankruptcy law for so many years, and having helped write the most recent changes to Indiana bankruptcy law, I can offer an answer to the question about frequent flyer points and airline tickets, and I don’t think you’re going to like that answer.

First of all, despite an airline’s PR to the effect it will honor all tickets and continue to operate, it’s really up to the bankruptcy court to decide whether that airline be be shut down and liquidated or continue to operate. If a bankruptcy airline is taken over by another airline, tickets may or may not be honored by the new owner.  And, if an airline is shut down by the bankruptcy court, mileage credits will be worthless.  (See, I warned you – you wouldn’t like the answer!)

Essentially a ticket holder is an “unsecured creditor” of the airline.  The first creditors to get paid in a bankruptcy are the secured creditors.  Those secured creditors might include an aircraft leasing company or a read estate lender.  The reasoning is that those loans are backed by assets that can be sold to satisfy the debt.

You might remember from former bankruptcy blogs of mine that there are different kinds of business and individual bankruptcy.  If an airline filed Chapter 11 reorganization bankruptcy, that means they have a proposal being considered by court to keep operating and to repay their debts over time.  If the company succeeds in getting its plan approved and then keeping up with the repayment schedule, your tickets and even your frequent flyer points might be safe.

In an ideal situation, I can help my business owner clients continue to operate their business and successfully execute their repayment plan.  In all situations, whether the company is liquidated or continues to operate, the bankruptcy safety net is designed to help business owners get a fresh lease on their business livesl
 

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This post was written by Mark Zuckerberg

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