A real estate agent. A dry cleaner. An ice cream shop. A pizza joint. A major building industry subcontractor. A well-known clothier. Those are just some of the local businesses that have spoken with Sarasota attorney Amy C. Boohaker about the possibility of filing for bankruptcy.
“I am seeing an uptick in business filings,” she says. “They are in the construction, mortgage, real estate and retail markets. The economy is definitely playing a major role in the filings. These businesses do not have the income coming in that they used to. If they have employees, they are laying them off and decreasing overhead either because they are trying to survive or because they are shutting the business down.”
Boohaker is also meeting with a lot of sole proprietors, people like handymen, sheet rock and metal workers, and brick layers. And not surprisingly, meetings with real estate investors, some inexperienced, others more seasoned, are also filling her schedule. “They’re upside down on everything or almost everything and can’t pay multiple notes, can’t rent, can’t sell, and can’t afford to pay the huge deficiencies that are accruing,” she says.
Sherry F. Ellis, a bankruptcy attorney with offices in Venice and Sarasota, has been seeing an increase as well and is predicting even more. “I’m doing a ton of business bankruptcies—cabinetmakers, contractors, masonry workers, pool people, even title companies and appraisers,” she says. “And I think we’ll see more businesses file. A lot have just been hanging on, hoping for season. So if season doesn’t pull them out we’ll see a lot of people in March and April.”
In 2006, more than 15,000 bankruptcy cases—both business and personal—were filed at the United States Bankruptcy Court for the Middle District of Florida, one of the busiest bankruptcy courts in the country, which serves 35 Florida counties, including Manatee and Sarasota, and cities like Jacksonville, Orlando, Tampa and Fort Myers. This year, 13,752 cases had already been filed as of July, compared with 8,058 during the same time period last year.
And the Middle District of Florida is not the only place seeing an increase in activity. According to data released by the Administrative Office of the U.S. Courts, the total number of U.S. bankruptcies filed during the first six months of 2007 increased 48 percent over the same period in 2006 in all bankruptcy court districts. There were 404,090 bankruptcy filings during the first half of 2007 (January 1 to June 30), compared to 272,604 filings over the same period in 2006.
The Greater Sarasota Chamber of Commerce doesn’t keep track of local bankruptcy filings, but the staff knows its members are hurting.
“We have experienced some dropping off in membership that we know is due to the economy,” says Virginia Ray, manager of membership development and sales for the Greater Sarasota Chamber of Commerce. Between October 2006 and September 2007, 599 businesses dropped out of the Chamber. Of those, 55 said their reason for leaving the Chamber was due to going out of business. According to Ray, that figure is up 10 or 15 percent over previous years, but the Chamber has no further information as to how or why the businesses shut their doors or if they’ve filed for bankruptcy. The Chamber remained at about 2,400 members, however, since other companies have joined. Manatee Chamber membership has grown slightly; 2,403 in December 2006, and 2,435 in mid-September 2007.
Local bankruptcy attorneys agree the real estate meltdown is playing a large role in business bankruptcy filings, but businesses also file for bankruptcy for other reasons, such as poor management, a failure to properly size up the competition, or a product that no longer holds interest to consumers. “For example, as people become more health conscious, certain types of fast food businesses have a harder time surviving in the marketplace, especially those that are over-franchised,” says R. John Cole II, a Sarasota attorney who specializes in bankruptcy and divorce cases. He also points out that for many small businesses, such as home décor shops, the prices they need to sell items at in order to turn a profit often become too high for them to compete with the chains.
In general, business bankruptcy filings tend to make up a small percentage of overall bankruptcy filings. For example, in the state of Florida in 2006, there were 24,709 non-business bankruptcy filings and 991 business filings, or less than 4 percent of total filings.
Traditionally non-business or individual bankruptcies are caused by the loss of a job, loss of health, or loss of a spouse. But in the last two years, real estate losses have become a major factor.
“The main person we talk to now is a real estate investor,” says Cole. “People are way overextended and unfortunately have been stuck with property that’s rapidly depreciated in value, and they’ve borrowed against it to the point they have little or no equity left. It’s a real significant change from what we used to see before the collapse of the real estate market.”
Here in Sarasota and Manatee counties, an area that’s become somewhat of an example of the dangers of real estate speculation, risk takers are paying the price. Not all were speculators, though. Many were people who simply got in over their heads on either their own residences or a single investment property.
That’s exactly the predicament of one of Boohaker’s clients, a 41-year-old husband and father of four in Manatee County. He and his family moved here from Michigan two and a half years ago for his wife’s job. They had purchased a new home but the builder fell several months behind schedule. With nowhere to live, they leased a home for awhile then decided to purchase a second house. They planned to live there until their original house was finished and then put it on the market.
But the real estate market tanked in the meantime and now they find themselves stuck with two homes worth far less than they paid for them. “Each home is $50,000 to $100,000 upside down in negative equity,” the man says. “We’ve pretty much wiped out our savings paying for everything, which is why we’re considering looking into a possible Chapter 13.”
Boohaker’s client is self-employed and working in the home improvement business. His wife works in advertising. Prior to their current problems, he and his wife both had FICA scores of over 720 (which is considered very good and usually gets borrowers the most favorable interest rates on a mortgage), and the income reported on their last two tax returns has been over $120,000. They’ve never had an issue like this with their finances before, and they didn’t get themselves into this situation in the interest of making a quick buck.
“We’re not real estate investors who came down here to get rich,” he says. “We never thought in our lifetime we’d ever be here. It’s a hard thing to watch a lifetime of savings just slip through your fingers.”
Boohaker says most of her clients who got caught in the real estate downturn have tried for months to avoid bankruptcy. “They’ve usually raided their retirement accounts and typically have nothing left, no savings, it’s all gone,” she says. “They’ve taken extra equity out of the house hoping their ship is going to come in in the interim; that they’re going to get the job, the higher salary; that they’ll be back on their feet and can pick back up and catch up. And it doesn’t happen.”
Bradenton attorney D. Turner Matthews, who’s practiced bankruptcy law for 38 years, says he’s busier than he’s been in a long time. “And I don’t see any immediate change to the situation,” he adds.
Of course, when crunching the numbers, one has to remember the bankruptcy law changes that went into effect in October 2005. The changes didn’t have much of an impact on business filers; the major impact was to the individual filer and bankruptcy attorneys. Today all filers must get credit counseling before they can file for bankruptcy. And some filers with higher incomes are no longer able to declare Chapter 7 bankruptcy (a liquidation of debts in exchange for personal property), but instead must file under Chapter 13 (in which a debt repayment plan is worked out).
“The recent changes are not positive changes all in all,” says Cole. “They’re making it more difficult for people truly in trouble to shed the debt they’ve got and get back to a productive lifestyle. Many folks come in now earning decent livings and don’t qualify for [Chapter] 7. It can create a more expensive bankruptcy for them. It doesn’t give the quickness and finality they need to get on with living.”
The new bankruptcy law has also increased attorneys’ workloads and has led some to raise their rates or to even stop practicing bankruptcy law. “It’s so complicated and intricate that if you’re not on top of your game, you can’t do it,” says Ellis. “It’s not something to dabble in anymore.”
Debbie Layer, market president for BankUnited in West Florida, says the increase in bankruptcies could be the beginning of a bigger issue for everyone.
“We live in a society where our economic situation is interrelated,” says Boohaker. “It impacts all of us. If you want to take out a home equity loan, you’re not going to be able to have as easy a time of it now as you could have six months or a year ago.” While it’s no surprise that credit will be harder to obtain for someone who has filed for bankruptcy, a big jump in bankruptcy filings or foreclosures (another growing problem due to the real estate market) could affect the cost and availability of credit for everyone.
“The biggest problem is this is a five-year cycle we’re in,” says Cole. “The impact at this point is probably fairly nominal, but the impact is growing almost on a monthly basis. And we’re only two years into the cycle. Another 20 to 30 percent of mortgages are likely to go into default. The potential for harm is enormous, and there’s probably almost no way to stop it.”
Bankruptcy by the Numbers
United States Bankruptcy Court for the Middle District of Florida filings as of July 2007
Entire district: 13,752
Chapter 7 filings: 8,101
Chapter 11 filings: 124
Chapter 13 filings: 5,523
United States Bankruptcy Court for the Middle District of Florida filings for 2006
Entire district: 15,304
Chapter 7 filings: 9,012
Chapter 11 filings: 126
Chapter 13 filings: 6,163
SOURCES: www.flmb.uscourts.gov/statistics and www.flmb.uscourts.gov/statistics Annual bankruptcy filings (business and non-business) for the state of Florida
Annual bankruptcy filings (business and non-business) for the state of Florida
First half of 2007: 18,320