New Bankruptcy Filings in Southland Set a Record : Economy: The surge suggests that the recession is hitting the area harder than previously believed.
Bankruptcies in the Los Angeles area are being filed at a rate of more than 6,500 a month, a record level that suggests the recession has cut deeper into Southern California than previously believed.
The more than 25,000 new personal and business bankruptcies filed in the last four months--including an unprecedented 6,776 in April--is up by more than one-third from a year earlier, representing roughly one filing for every minute the U.S. Bankruptcy Court Clerk’s Office has been open this year.
The dramatic growth in bankruptcies is further straining what is already the nation’s busiest bankruptcy court. Each year it processes more than double the number of new cases handled by the next-busiest courts nationwide.
Lines at times numbering more than 200 people now snake through the ninth floor of the Federal Courthouse in Los Angeles, where cases are filed. Last week, the huge increase in volume prompted Bankruptcy Court Clerk Frank E. Goodroe to post an unprecedented public apology for the long delays, pleading for “patience and understanding during this especially busy time.”
While bankruptcy experts expected an increase in local bankruptcy filings with the slowdown in such businesses as aerospace, construction and retail, no one was prepared for what happened.
“What you see is a recession in motion. I don’t see much out there now that will cause it to reverse,” said Richard A. Stewart, a bankruptcy specialist in Los Angeles with the accounting firm Grant Thornton.
Chief Bankruptcy Judge Calvin K. Ashland said he has requested four new bankruptcy judges to help hear the unexpected rise in cases. He said bankruptcy activity is likely to remain high even if the Southern California economy recovers because of the area’s growth.
“Filings are going up because of the recession, but they won’t go down when there’s a recovery by the same amount of that increase,” Ashland said.
The rising number of cases is only part of the problem for the area’s bankruptcy system. Also straining the system is the growing number of large, complex cases such as the filing this year by Carter Hawley Hale Stores, the Los Angeles parent of Broadway department stores. Six employees work full time in the clerk’s office on the Carter Hawley case, with an area the size of two typical Southern California houses allocated just for its paperwork.
Experts say one reason for the big increase in Southern California cases is the steep decline the last two years in the area’s once-hot real estate market.
Many business owners borrowing money pledged as collateral property that turned out to be worth much less than expected. And people who borrowed money to bet on real estate investments are increasingly seeking refuge in bankruptcy court as the investments go sour.
“Every couple of days we seem to be taking over another building,” said Encino lawyer Barry Chatz, a bankruptcy specialist affiliated with a law firm that often acts as a court-appointed receiver.
The cooling of the area’s economy in general also has contributed to the bankruptcy surge. Stewart, the Grant Thornton partner, says he often finds that deep-seated problems at many companies were masked by increasing sales that came with the boom in Southern California’s economy in the 1980s. Once the economy slowed, sales slowed and many of those companies began experiencing severe cash flow problems.
“When sales shrink, problems come out of the woodwork. Before you know it, you are looking at bankruptcy for protection,” Stewart said.
Two other factors include rising health care costs, which often forces people with inadequate health insurance coverage into bankruptcy court, and steep credit card debt. Bankruptcy lawyers say that in a recession people who lose their jobs often unsuccessfully try to juggle their bills using credit cards, hoping to land a new job soon.
The more than 25,000 filings were made through the Los Angeles-based Central District of the U.S. 9th Circuit. That includes filings made by companies or individuals in Los Angeles, Orange, Ventura, San Bernardino, Riverside, Santa Barbara and San Luis Obispo counties. It does not include San Diego and Imperial counties, which are in a separate district.
Goodroe, the Bankruptcy Court’s chief clerk, said the rate of increase in bankruptcies in the Los Angeles area is rising faster than in any other area in the 9th Circuit, which includes Arizona, Nevada and the Pacific Northwest. He said, however, that bankruptcies are rising faster in New England and parts of the Northeast, the areas of the country experiencing the worst economic slump.
UCLA economist David Hensley said the increase in the Los Angeles area is in line with his belief that Southern California over the last year has done much worse in the recession than the rest of the state.
“We fell off a cliff in the second half,” Hensley said.
Increases have come in both business and personal filings. Statistics from the court show Orange County with the highest percentage increase in the Los Angeles area, up more than 37% in the first quarter from a year earlier.
L. E. Creel III, a Dallas lawyer who serves as vice chairman of the American Bankruptcy Institute, said federal officials are predicting that the number of bankruptcies could rise to as many as 900,000 this year from 725,000 last year.
He blames the increase in part on tighter bank credit, which has dried up funds that often are needed to keep strapped businesses out of bankruptcy.
Southland Bankruptcies
This chart includes business and non-business filings made under Chapters 7, 11 and 13 of the U.S. Bankruptcy Code in Los Angeles, Orange, Ventura, Riverside, San Bernardino, Santa Barbara and San Luis Obispo counties.
MONTH 1990 1991 % INCREASE January 4,479 5,805 29.6% February 4,424 6,002 35.7% March 4,742 6,432 35.6% April 5,051 6,776* 34.2% Total 18,696 25,015 33.8%
*preliminary figure
SOURCE: Clerk’s Office, U.S. Bankruptcy Court, Central District of California
Bankruptcies Since 1985
The following shows the number of business and non-business (mostly personal) bankruptcies filed from 1985-1990 under Chapters 7, 11 and 13 of the U.S. Bankruptcy Code in Los Angeles, Orange, Ventura, San Bernardino, Riverside, Santa Barbara and San Luis Obispo counties.
YEAR BUSINESS NON-BUSINESS TOTAL 1985 3,755 36,934 40,689 1986 4,390 42,428 46,818 1987 4,316 45,201 49,517 1988 2,699 48,384 51,083 1989 3,017 51,261 54,278 1990 3,125 56,520 59,645
SOURCE: Clerk’s Office, U.S. Bankruptcy Court, Central District of California
