Many San Luis Obispo County residents sought a fresh start in U.S. Bankruptcy Court last year — including homeowners in the middle- to upper middle-income range who have been slammed in the recession.
The U.S. Bankruptcy Court for the Central District of California — which ranges from Riverside County to San Luis Obispo County — saw a record number of filings last year. In San Luis Obispo County alone, a total of 1,296 bankruptcies were filed last year, up nearly 17 percent from 1,112 the previous year.
The majority of cases were Chapter 7, in which a bankruptcy trustee discharges many or all of a consumer’s debts.
“The large majority (of people filing) are in trouble with their mortgages and have nowhere else to turn, and at this point, the banks are not working with them,” said bankruptcy attorney Morgan Holland, noting that many filers now are homeowners in the middle- to upper-income range.
“We’ve got people that may have purchased in 2004, and maybe even in 2003, and may have had a 30-year fixed loan and they’re trying to sell and they can’t. They still owe more now on it than it’s worth.”
With their house underwater, many clients have little choice but to rack up credit card debt.“It’s like a chain reaction,” he said.
San Luis Obispo bankruptcy attorney David Farmer said the level of bankruptcies is as high as he’s seen in 40 years of business.
Farmer, too, said it’s due in large part to the real estate market as well as joblessness.
“A lot more of them got into bad loans or borrowed money against equity that has now evaporated, and they hoped to refinance their way out of it and they can’t,” he said. “California has been resistant to this sort of downturn in the real estate market, but it didn’t resist long enough this time.”
Farmer said many public service employees — educators and government workers — have sought his help as many have lost their jobs or been subjected to furloughs.
More people 65 and older are filing, Farmer said.
“If you’re living on a fixed income and you are 80 years old, you’re not going to be going out to get a new job,” he said. “Many times, they use their credit cards to solve the problem, but then there’s no solution for next month.”
Bankruptcies in the United States increased 9 percent in 2010 from the previous year, according to data from the National Bankruptcy Research Center. Filings have increased each year since 2005 when the Bankruptcy Abuse Prevention and Consumer Prevention Act was enacted.
The new law was designed to make it more difficult to file for bankruptcy protection.
To file Chapter 7 bankruptcy — often referred to as straight bankruptcy — a means test must be applied to determine whether individual consumers qualify for relief. If the consumer does not qualify, he or she may have to file under Chapter 13, which requires that the debtor make payments to creditors through a trustee over the life of the payment plan.
Another change is that individuals must undergo credit counseling in a government-approved program before filing.
Local bankruptcy attorneys such as Farmer counsel clients to use bankruptcy only as a last resort after they have exhausted other avenues, including credit counseling from an approved agency.
Filing for bankruptcy has an impact on credit and stays on an individual’s record for 10 years, he said.
“If you have another option where you can pay off your bills at a discounted rate, your financial record will look better and everything will come out better,” he said.
Nina Ericksen, director of community and public relations for Surepath, formerly Consumer Credit Counseling Service, said it works with creditors to devise a plan to help clients become debt free.
That only works if people “come to us first and early,” Ericksen said. “People tend to wait so long in a situation where the options are depleted sooner. If they come for help sooner, we can map out choices.”
Whether someone ultimately decides to file for bankruptcy is as much an emotional issue as it is legal or financial, she said.
“It’s a public admission that you haven’t lived up to your own personal dreams. You know you haven’t lived up to your dreams if you’re getting 14 calls from bill collectors.”
Farmer said he believes more people will seek a remedy in bankruptcy court until the job market improves.
“Until I see an uptick in employment, I don’t see bankruptcy numbers are going to change,” he said.Even though filing for bankruptcy should not be done lightly, it does offer some people hope for a brighter future.
“Even if they don’t file today, they can leave here with a plan,” Holland said. “I can’t tell you how many times people walk out of here and say ‘I feel better.’ ”
Overall bankruptcy filings in U.S. Bankruptcy Court for the Central District of California, which includes San Luis Obispo County, increased 31 percent last year to 142,789. That surpassed the previous high set In 1998 by 18 percent.
Nationwide, there were more than 1.5 million bankruptcies filed last year, compared to more than 1.4 million the previous year.
Sources: U.S. Bankruptcy Court, American Bankruptcy Institute, data from National Bankruptcy Research Center