Bankruptcies soar as
economy fades
Northern California residents, businesses having hard time
coping
BY DEBORAH LOHSE
Mercury News
Bankruptcies for Northern California residents and businesses are at their
highest in two years because of the eroding economy, layoffs and fears of
pending changes in bankruptcy law, and it's likely to get worse before it gets
better, experts said.
In the northern judicial district of California, 2,181 businesses or individuals
filed for various types of bankruptcy relief in March. That's the highest level
since June 1999, with 2,363 filings, and up considerably from the 1,460 such
filings in February.
``Those statistics are what I would have expected,'' said bankruptcy attorney
Michael Malter of Binder & Malter in Santa Clara. ``Every bankruptcy
attorney I know has more business than they know what to do with.''
The northern district serves 15 counties, including Santa Clara, San Mateo
and San Francisco. In San Jose and surrounding areas alone, the number of
Chapter 7, 13 and 11 filings spiked to 709, the highest since 725 such filings
in May of 1999.
The trend appears to be nationwide, said David Light, editor of Consumer
Bankruptcy News. Nationwide figures won't be out for a few weeks, but
areas including Seattle and Salt Lake City report similar filing surges, he said.
Businesses have been hurt by the lagging economy, the death of dot-coms
and the resultant pressure on other companies that served them.
Attorney Malter said he has been counseling many businesses through
bankruptcy proceedings lately, and expects the death toll to keep rising.
Moreover, he expects many of them to file for Chapter 7 -- a total debt
wipe-out -- rather than a reorganization.
Many high-tech companies don't have much in the way of hard assets, and
those they have are competing to be sold in a market glutted with dot-com
fire-sale items. And venture capitalists, who backed many of these failed
businesses, are less likely than banks to help them work out from under,
Malter said.
On the personal level, a big culprit is the increasing number of layoffs.
Announced layoffs reached a level of 162,867 in March, a record at least
since 1993, according to outplacement firm Challenger, Gray & Christmas.
``A lot of people are thinking of bankruptcy just because they are looking at
unemployment for the first time in their lives,'' said T. Michael Turner, a Menlo
Park bankruptcy attorney.
Turner said he'd been consulted by a young tech worker who'd racked up
$30,000 in credit-card debt while he got his MBA, and now has been laid
off.
``With credit-card rates being what they are, that's a very hard debt to service
unless you have a really good job,'' said Turner.
People also are fearful that a federal law pending in Congress would make it
harder for them to file Chapter 7, by adding administrative hurdles and
inserting a new ``means test''. Though the bill -- which is still in Congress --
wouldn't take effect for probably six months after passage, many people
believe ``the bankruptcy hospital door is about to close,'' said James ``Ike''
Shulman, a San Jose lawyer and legislative chair of the National Association
of Consumer Bankruptcy Attorneys.
``A lot of people who had been contemplating bankruptcy and putting it off
have heard the news and panicked,'' said Shulman.
Another factor may be a nasty tax problem facing many high-tech employees,
attorneys said. Many such people exercised stock options last year when the
stocks were at record levels, without actually selling the shares. In countless
cases, they now owe hundreds of thousands of dollars in tax based on very
high values, yet have no actual cash to pay the bills.
``I'm very interested to see what the post-April 15 spike (in bankruptcies) is
going to look like,'' said Malter.
Several attorneys said clients often wrongly believe that bankruptcy is a
panacea.
Turner said he recently counseled a couple that wanted to file for bankruptcy
until they learned it wouldn't help them keep their $1 million home in Palo
Alto.
The pair had jobs in high-tech and had qualified for a mortgage, otherwise out
of their reach, partly because they had stock options. But those options are
now worth half their former value and the pair have at most a year before
they're under water. If they went bankrupt, they stood to get at most about
$100,000 of any equity they'd built up, but lose the house.
``Both of them were very upset,'' said Turner. ``I had to counsel them that
bankruptcy probably wouldn't solve their problem.'' |
