News - Local

Published: Sunday, Jul. 05, 2009

Bankruptcy filings increase locally

Number of cases for the first four months of this year has risen 63 percent from last year

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With the economy struggling to find hints of recovery, California’s budget in crisis and job losses mounting, more Central Coast residents, business owners — and now government employees and teachers — are finding relief in bankruptcy court. The number of all bankruptcies in the first four months of the year rose nearly 63 percent from the same period last year, according to the most recent figures from the northern division of the U.S. Bankruptcy Court Central District of California. The northern division covers San Luis Obispo, Santa Barbara and parts of Ventura counties.

The majority of filings were Chapter 7 bankruptcies — the most severe form of bankruptcy — in which filers seek to be free from all debt. They jumped 64 percent from the same period in 2008.

Chapter 13 bankruptcy filings, which allow people with income to keep their assets while developing a repayment plan with their creditors over a three-to-five-year period, increased nearly 40 percent from the year-earlier period. Filing under Chapter 13 can help homeowners save their property from foreclosure because an automatic stay is issued.

A total of 17 filings were listed under Chapter 11 in which business owners and individuals enter into a court-approved reorganization plan. That compares to three in the same period in 2008.

“This is the worst I’ve seen it,’’ said David Hagan, a Grover Beach bankruptcy attorney in practice for 14 years. “About 90 percent of my business now is related to bankruptcies.”

In this weakened economy, no one is immune from seeking bankruptcy protection, Hagan said. However, the majority of his clients are self-employed professionals such as contractors and those in the building trades, and small business owners who own retail shops and restaurants, he said.

These professionals suffered financial strain when the housing market collapsed, Hagan said.

“They were doing services that people are giving up on,’’ Hagan said. “The flip side of it is that the credit lines they were running on have been cut off. They couldn’t get the money that they needed.”

Those directly related to the housing market, such as real estate agents and mortgage brokers, were also hit hard, Hagan said, noting that many did not predict that there would be such a major correction so soon.

“Most people figured that they were flying at 30,000 feet, and if the plane started to go down, they would still have time to get out in a graceful manner,” he said.

Bankruptcies may surge

As unemployment ticks up in California and across the nation, bankruptcy filings are expected to surge, according to the American Bankruptcy Institute, a nonpartisan group dedicated to bankruptcy research and education.

A total of 330,477 new cases were filed across the country in the first three months of the year, compared to 245,695 in the same period in 2008. The organization forecasts that filings will exceed 1.4 million cases by the end of the year.

This is despite the Bankruptcy Abuse Prevention and Consumer Protection Act, a law passed in 2005 that was designed to make it more difficult to file personal bankruptcies and requires those filing for bankruptcy to undergo credit counseling.

At Farmer & Ready Law Firm in San Luis Obispo, the number of cases filed has doubled from this time last year, bankruptcy attorney David Farmer said.

His clients range from seniors on fixed incomes who have racked up too much credit card debt to families who bought more house than they could afford.

“What we are seeing are people who in 2005 and 2006, after hearing glory stories from their friends who made money in real estate, decided to buy a bunch of property,’’ he said. “These are people with modest incomes who own five different pieces of property, and who bought them with nothing down with the belief that everything would continue to go up.”

But the most recent wave of filers, Farmer said, are teachers who have been laid off.

In some instances, clients have gone from a two-person income family to no one in the family generating income, he said. State employees, he said, are also finding it difficult to stay afloat.

“It used to be that you could take a government job, and you knew it might pay a little bit less, but you would have it for life,’’ he said.

Bankruptcy is a tough and painful decision of last resort, Hagan said. But if someone finds that it’s the only option, he said it can offer an opportunity for a fresh start.

Every state has exemptions that allow people filing under Chapter 7 to keep some personal goods, including a car, clothing and tools of trade, according to the American Bankruptcy Institute.

“It’s not the end of everything,’’ Hagan said.