As I watched the closing ceremonies of the London Olympics my thoughts turned to the coming work week as a bankruptcy practitioner … and when and from where the next client(s) will come.
Bankruptcy practitioners from coast to coast have been pondering this dilemma as Chapter 7 and Chapter 13 filings continue to slide. The national statistics as of June 30, 2012 shows a 14% drop in Chapter 7 filings and a 29% drop in Chapter 13 cases.
I have been, almost exclusively, a bankruptcy attorney for the past 37 years. I have been through several other ‘recessions’ as they call them, but nothing as unusual or unpredictable as this one.
We have all heard rumors and arguments that the economy is recovering nobody can afford lawyers. I believe some are finding it impossible to save for legal fees I put no stock to the argument that the economy is turning around.
Here is what has really been happening – and why we’re in for another wave of bankruptcy filings soon.
In 2007, 2008, and 2009, banks and other real estate lenders went straight to foreclosure once you were in default on your loan. Foreclosures in non-judicial foreclosure states such as California were completed in as little as 4 to 6 months. Few lenders considered loan modifications or other workouts, which led to a marked uptick in the pace of bankruptcy filings in California.
Now California is experiencing a rash of short sales. This causes foreclosures to take longer to complete. Plus, last year lenders placed a moratorium on foreclosures due to the ‘robo-signing’ fiasco associated with foreclosures.
Homeowners who are in the bottleneck see no immediate reason to file for bankruptcy relief. Either their loan mod will be approved or they will short sale the property.
They are living rent-free for longer than ever before, and are using that money to pay down their credit card debt. People who otherwise would be filing for bankruptcy are able to live fairly well and to even pay down their credit card debt as the foreclosure process slows to a crawl.
That’s all about to change, and the numbers bear it out. California foreclosures increased 18% in June 2012 over the month before, and California now leads the states in pending foreclosure actions for the first time since 2005.
As foreclosures begin to ramp up once more, homeowners won’t have as many options to resolve their bill problems. That’s why I expect people to be considering bankruptcy in record numbers as 2012 comes to a close and 2013 begins.
David G. Weil is a bankruptcy lawyer in San Diego. He is the CEO of Golden State Law Group, P.C.