Jackson Hewitt files for bankruptcy with pre-packaged plan

Jackson Hewitt Tax Service Inc, the second largest U.S. tax preparer, petitioned for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware on May 24. The Company submitted a pre-packaged plan along with its bankruptcy filing that contains the necessary approvals from its secured lenders, and has asked the Court to approve the plan on an expedited basis.

A prepackaged arrangement permits companies to move through the court process more rapidly. Jackson Hewitt announced that it expects to emerge from bankruptcy in 45-60 days and sees no disruption in its day-to-day operations.

Jackson Hewitt earns most of its revenue through its franchises and tax preparation agreement with Wal-Mart Stores.

"This is a very important and positive day for Jackson Hewitt and its key constituents," stated Philip H. Sanford, president and chief executive officer of Jackson Hewitt. "The debt and interest rate burden we have carried in recent years has limited our potential and financial flexibility and, this will no longer be the case."

Jackson Hewitt's revenues declined sharply in 2010, when actions by the Internal Revenue Service (IRS) and the Federal Deposit Insurance Company (FDIC) effectively ended the company's ability to offer Refund Anticipation Loans (RALs). RALs are short-term, high interest loans made to taxpayers based on their expected refunds. According to court papers, Jackson Hewitt earned 22 percent of its 2010 revenue from these loans.

RALs became vulnerable as products for all of the tax preparation companies when the IRS announced in August 2010 that it would no longer issue a report called the debt indicator, which was used as an underwriting tool for RALs. Many banks that had provided the funds for these loans, including Chase, decided they were too risky and voluntarily withdrew from RAL programs.

In February 2011 the FDIC issued a Cease and Desist order against Republic Bancorp in Kentucky, one of the few remaining banks that backed RALs, and the bank that funded Jackson Hewitt's program. The FDIC detailed widespread legal violations in Republic's RAL program and proposed a $2 million civil money penalty to be imposed against Republic. By March, Jackson Hewitt's shares were worth pennies.

H&R Block and Liberty Tax Services, Jackson Hewitt's principal competitors, no longer offer RALs. Both companies continue to offer customers professional services in brick-and-mortar locations, but they are also working on adding online tax preparation options. Liberty offers clients access to its eSmart Tax product. H&R Block's November acquisition of the owner of Tax ACT has recently been challenged by the Justice Department which says the acquisition is anti-competitive.

Jackson Hewitt Inc. was founded by John Hewitt in 1986 as a franchiser of tax return preparation franchises. Hewitt left the company when Jackson Hewitt went public and was sold, and in 1997 created JTH Tax Inc., a corporation founded to develop tax preparation service businesses such as Liberty Tax Service. Hewitt currently serves as the President, chief executive officer, and chairman of Liberty Tax Service Inc.

Under the terms of the proposed plan, Jackson Hewitt's current secured lenders will receive their pro rata share of a new $100 million term loan and all of the equity in the reorganized company. The Company also anticipates entering into a new $115 million revolving credit facility. Jackson Hewitt's new equity will be privately held and all of its existing equity will be cancelled.

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