22 Jul Bankrupty and the MLM Distributor – Part I: Why there is Enhanced Risk
Over the past couple of years I have met with several potential clients who were in the MLM (multi-level-marketing) business and were looking to file (Chapter 7) bankruptcy. Recently I spent a good 45 minutes on the phone with another potential client in the MLM business and this conversation got me thinking about the issues unique to MLM distributors.
The MLM business, as you may know, involves the selling of products or services by individuals to other individuals. Marketed as a “home based business” MLM programs allow an individual with an entrapreneurial streak to earn residual income from resellers in his “down line.” When you become a distributor you can both sell the product or service, and you can recruit and manage others to sell for you. If others are successful in selling, you get a commission on their sales, and if your recruits are able to recruit others, you get a piece of the sales from those below you on the pyramid.
Amway is perhaps the nation’s best known MLM program, but there are hundreds of them, selling everything from vitamins to long distance service. A motivated distributor with an active down line can earn a nice living with long term residuals. On the other hand, it does take a lot of work to make an MLM business a success and some distributors end up spending a lot of time and money, while earning little or know money.
The folks I generally see are serious MLM distributors who have spent months or years building and supporting a large organization (down line). Often they have incurred thousands of dollars on credit cards for travel, advertising and conventions. In some cases the financial crisis arises when the sponsoring company suddenly changes the terms of the distribution commission structure, or because sales have dropped off due to the economy or competition in the marketplace.
Often my MLM distributor client contacts me when sales are down or when he is changing from one MLM program to another (i.e. changing from selling nutrition products to selling telephone service). In many cases I come to the conclusion that MLM and bankruptcy are not a particularly good fit. At best, there is going to be increased risk of objections if the distributor intends to remain in the MLM business. At worst, the distributor will find himself in expensive and time consuming litigation with the trustee regarding questions of income suppression and asset diminution.
As a bankruptcy attorney I see my role as that of evaluating risk and recommending a course of action:
- A single Chapter 7 debtor who has worked 20 years at a shoe store and who earns $25,000 annually (well below the median income) with $30,000 of old credit card debt is a low risk case.
- A 53 year old engineer who was let go from his $110,000 job 2 years ago and who has been working at Home Depot for the past 18 months at $12 per hour is a slightly higher risk because of his income potential, but the risk is minimized by the 2 year period that he was not able to earn six figures.
- A 28 year old MLM distributor who has earned $200,000 for the past three years and has built three organizations from scratch but who is currently earning little or no income for the past 3 weeks, while he starts to rebuild a fourth network for a new product is a much higher risk because of his history of high earnings, his age, and the likelihood that he will soon return to profitability.
There are several specific areas of risk, which I will cover in Part II of this series.
Jonathan Ginsberg, Esq.
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