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Web Firm NextCard Files for Chapter 11

The online credit card issuer is seeking to reorganize as a financial services consultant.

November 15, 2002|Michael Liedtke | Associated Press

Online credit card issuer NextCard Inc. sought bankruptcy protection Thursday in a last-ditch attempt to come back as a financial services consultant.

The Chapter 11 filing, in a Bankruptcy Court in Delaware, had been anticipated. Federal regulators seized San Francisco-based NextCard's bank nine months ago and then cut off its credit card operations in July.

The company had been staying afloat under a service contract with the Federal Deposit Insurance Corp. The agency ended the arrangement Oct. 31.

A onetime darling of the dot-com boom, NextCard got into trouble with regulators a year ago after issuing too many credit cards to deadbeat borrowers.

NextCard listed the taxpayer-backed FDIC as its largest creditor with a debt of $140 million. In court papers, the company said the FDIC last month agreed to waive the obligation in exchange for a stake in NextCard's reorganized business or part of the proceeds if the business is liquidated.

Either way, the FDIC figures to sustain a substantial loss on NextCard's failure. The agency previously has estimated its losses on NextCard could run as high as $400 million.

The Securities and Exchange Commission is investigating NextCard's downfall.

Despite its problems, NextCard says it can survive as a consultant to other financial services firms. NextCard "believes that such institutions can derive significant value from [the company's] intellectual property," Robert Linderman, the company's general counsel, said in a sworn declaration.

If its reorganization plan doesn't pan out, NextCard said it will liquidate. There doesn't appear to be much left for creditors. As of Sept. 30, NextCard said it had $18 million in assets.

Besides the FDIC, NextCard's major creditors include Amazon.com Inc., which is seeking $10.5 million for an alleged breach of contract. NextCard disagrees with Amazon's claim.

The bankruptcy filing didn't elaborate on the nature of the dispute. Seattle-based Amazon.com, which owns an 8% stake in NextCard, had operated an incentive program that rewarded customers who ran up big balances on NextCard's Visa cards.

NextCard once promised to revolutionize the credit card business. Its comedown has hurt shareholders, customers and employees.

The company's stock, which peaked at $53.12 a share in late 1999, is virtually worthless. About 800,000 NextCard customers abruptly lost access to their credit lines in July when the FDIC shut down their accounts. Only 19 employees remain on a NextCard payroll that peaked at 925 employees in early 2001.

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