Bankruptcy and Banking & Finance

Home-foreclosure hiatus drives down bankruptcies

January 14, 2012

Fever chart of bankruptcy filings from 2006 to 2011Bankruptcy filings in the Indianapolis area fell 17 percent last year, more than in the nation as a whole, but attorneys don’t see an improving economy in those figures.

They say the decline was driven more by stalled foreclosure proceedings.

“The drop in mortgage foreclosures and sales definitely impacted filings,” said John Petr, an attorney at Kroger Gardis & Regas and a Chapter 7 trustee for the U.S. Bankruptcy Court for the Southern District of Indiana. “That deadline to stay in the home wasn’t there.”

There were 22,754 cases filed in Southern District in 2011, compared with 27,394 the prior year. The district encompasses the southern two-thirds of the state and has offices in Terre Haute, New Albany and Indianapolis, where most of the cases were filed.

The caseload dipped below the 2008 level but remained higher than 2007, the last year before the recession, when 18,733 cases were filed.

Nationwide, bankruptcy filings declined 12 percent, to 1.38 million, the American Bankruptcy Institute in Alexandria, Va., reported.

Banks halted foreclosures last year after they were caught processing earlier cases illegally—the so-called “robo-signing” controversy. The still-depressed housing market is an added incentive for banks to hold off on foreclosures, instead of adding more vacant houses to their portfolios.

Attorneys said they expect filings to rise this year, as banks start to push through foreclosures again.

“The pipeline of cases I have is probably bigger than it’s ever been,” Noblesville-based bankruptcy attorney Jonathan Brown said.

Mark Zuckerberg, who has the largest personal bankruptcy practice in Indiana, thinks attorneys will begin to see consumers who walked away from houses that are worth less than the outstanding debt.

Even after selling an “underwater” house, banks want to collect the difference from someone, Zuckerberg said.

He thinks many Hoosiers are avoiding bankruptcy because they’ve given up hope. With no jobs or savings, they see no assets worth protecting when creditors come knocking.

“You ever heard the phrase, ‘You can’t get blood from a turnip?’” Zuckerberg said. “A lot of these people are turnips, and there’s nothing that can be done to them.”

Another factor in the decline is a reduction in household debt, said Samuel Gerdano, executive director of the American Bankruptcy Institute. He said consumers are spending less, and have less access to credit.

The most common form of bankruptcy filing is Chapter 7, which is used by both consumers and business owners to erase debt and start fresh, followed by Chapter 13, in which a debtor sets up a repayment plan.

Large businesses typically reorganize under Chapter 11.

Nationally, business filings fell further than consumer filings, the American Bankruptcy Institute said. Using data provided by Epiq Systems Inc., ABI reported a 19-percent decline in business filings, which included both Chapter 11 and Chapter 7, versus an 11-percent drop for consumers.

Data from the Southern District of Indiana showed a similar trend. There were 84 Chapter 11 filings last year, down 26 percent from 115 in 2010.

Henry Efroymson, chairman of the bankruptcy practice group at Ice Miller, said many of his business clients are beginning to see better times after suffering since 2007.

Another factor, he said, is, “There is a lot of forbearance activity going on,” as lenders hope they’ll be repaid once the economy improves

Jim Carlberg, chairman of the Bankruptcy and Creditors’ Rights Group at Bose McKinney & Evans, doesn’t think the economy is improving fast enough to help most businesses.

After three years of dealing with commercial real estate, he expects to see other types of businesses in court this year.

“I think it could run the gamut of retail, manufacturing, distribution, everything other than real estate,” Carlberg said.

Many small businesses that were vulnerable to the recession succumbed to Chapter 7 in 2009 or 2010, which partly explains the decline last year, Petr said.

Even in a thriving economy, bankruptcy is a steady practice because the “big three”—divorce, medical bills and unemployment—never disappear, said Brown, the Noblesville bankruptcy attorney.

Medical bills were what tripped up a McCordsville couple Brown represented at a creditors’ hearing this month. Though the couple, who did not want to be named, had a pension, medical benefits and part-time jobs, they underwent surgeries with huge out-of-pocket expenses.

The problem compounded because they paid the bills with high-interest credit cards, the husband said. “We’ve always paid the minimum amount. We just got into a rut.”•

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