Bankruptcy filings in the Tri-Counties have exploded this year, jumping more than 70 percent amid a weak economy and faltering real estate prices.

Attorneys who handle the filings say the housing market crash and subsequent credit crisis account for much of the surge. The sharp increase has some firms giving up weekends and adding staff to handle the extra cases.

“I’m making an awful lot of Saturday appointments, which I didn’t used to do,” said David B. Commons, a Goleta-based bankruptcy attorney and chair of the Santa Barbara County Bar Association’s Debtor/Creditor Section. “I’ve been doing this since 1971 and I’ve never seen a time like this before.”

“We’ve added an attorney and a paralegal to help handle the workload, and we’re still busy,” said William Winnfield, chair of the bankruptcy practice group at Oxnard-based Nordman Cormany Hair & Compton, where he is a partner.

In the division of the U.S. Bankruptcy Court that covers most of the Tri-Counties, Chapter 7 filings in the first five months of 2008 shot up 70 percent from the year before. Chapter 13 filings spiked 80 percent, with the overall number of filings rising about 71 percent.

Chapter 7 proceedings, which cover both businesses and consumers and are often called a “straight” bankruptcy, usually entail the liquidation of assets. Chapter 13 allows debtors to keep property and pay debts back over time, usually three to five years.

There were too few filings under Chapter 11, which covers reorganizations, and Chapter 12, which covers family farms and fishermen, in the Tri-Counties to make meaningful comparisons to years past.
“Chapter 11 was designed with Delta Airlines and Texaco in mind,” Winnfield said. “It’s very easy to get into Chapter 11 and very hard to get out.”

Bankruptcy attorneys interviewed by the Business Times said the increase in tri-county filings comes in large part from homeowners who have tapped out their home equity credit lines, credit cards and, finally, savings. When the bottom drops out, the housing market provides no refuge.

“People have gotten in over their heads in chasing this real estate thing and are paying the price,” said Jay Michaelson, a partner in Santa Barbara-based firm Michaelson, Susi & Michaelson. “Before this, if you owned a house and you were in trouble, you would sell it or you would refinance. But those options just aren’t available to people.”

Business bankruptcies are up as well, particularly for small businesses that depended on credit as grease for tight times.
“A lot of small businesses have financed their businesses with personal credit cards,” Winnfield said. “A lot of them are having a hard time holding on now that credit is less available.”

Commons said areas where housing boomed faster – Lompoc, Santa Maria, Oxnard – suffered most. He’s heard from small-scale contractors, formerly in the business of modest building and remodeling projects, that have gone under. “It’s the small businesses getting creamed,” Commons said.

Commons also has seen many independent truckers, who often pay for their own fuel, forced into bankruptcy by spiraling petroleum prices. “Two years ago his gas cost him $400 a month,” Commons said of one trucker. “Now it costs him $1,000 a month.”

In the first five months of 2008, there were 896 Chapter 7 filings, up from last year’s 527. Chapter 13 filings went from 60 to 108, and the total number of filings, which include a handful of Chapter 11 cases, jumped from 590 to 1,007.

As filings soar, changes in the bankruptcy code have made filing for Chapter 7 more difficult for consumers and attorneys alike.

A 2005 law – enacted after heavy lobbying by the credit card industry – mandated that debtors with above-median incomes pass a “means test” to qualify for Chapter 7. If a consumer has enough income, the law directs him or her into Chapter 13 or into cutting a deal with creditors.

The law was billed as a way to prevent abuse, and consumers need an attorney for the test. The result is that most Chapter 7 filings are now attorney-assisted.

Attorneys weren’t happy about this, and some quit handling Chapter 7 cases. They said the test is mostly an added layer of time and expense for both the client and the firm: Most consumers pass anyway.

The law didn’t have much effect on how many people file Chapter 13 instead of Chapter 7, Winnfield said. Just as many seem to be going for liquidation as were before the law took effect. “The difference is that it’s costing them more because the attorneys fees are higher,” Winfield added.
While businesses aren’t affected by the new law, Michaelson said many of them choose to work out a debt crisis outside the court system to save on costs.

A retailer might liquidate and move on, or a developer might realize it has nothing left in its real estate. “You can’t reorganize around no equity,” Michaelson said. “They’re going to either make a deal with the lender or give up the ghost.”