A boom in bankruptcies

From the length of the court calendar, it looked like Judge Alan Jaroslovsky was going to have a long morning.

A total of 47 cases were scheduled for hearings Thursday in his Santa Rosa bankruptcy court, each involving a creditor seeking permission to seize a debtor's property.

While a few cases dealt with debts on cars or commercial properties, the vast majority involved lenders attempting to foreclose on homeowners who had sought safe haven in the courts from the fallout of the subprime mortgage crisis.

Instead of fighting for their homes, however, most didn't even bother. In case after case, homeowners simply let lenders begin foreclosing on homes that are now worth less than the mortgages owed on them.

So instead of an arduous morning filled with adversarial hearings, most cases flew by.

"I've never seen anything like this before," Jaroslovsky said before the hearing. "I've never seen so many people care so little about losing their homes."

Bankruptcy filings almost doubled in Sonoma County last year, when 887 people and businesses sought protection from creditors in Jaroslovsky's courtroom.

And filings will likely increase even more this year, several attorneys predicted.

"I'm sure 2008 is going to be much higher than 2007," said Doug Provencher, a Santa Rosa bankruptcy attorney.

In previous periods of economic hardship, homeowners typically fought like hell to save their homes, Jaroslovsky said. They asked for more time, proposed repayment schedules and tried anything they could think of to hold onto their properties.

Today, however, it's a very different story. Bankruptcy courts are seeing a sharp increase in cases filed by homeowners unable to make payments on houses whose values are plummeting.

"What you're seeing is the fallout from the mortgage crisis," said David Chandler, a bankruptcy attorney in Santa Rosa. "In case after case after case, there's just no hope."

Attorneys are bracing for a surge in bankruptcies this year because there is often a significant delay between the time when people get in financial trouble and when they seek help.

It wasn't until late 2007 that some economists started talking about a recession. There also seems to be little sign the housing market is going to bounce back anytime soon, Provencher said. As the market slides, more people have been unable to refinance out of risky loans before they adjust to higher rates.

Many homeowners put basic living expenses on their credit cards as they funneled everything they had into escalating mortgage payments, Provencher said. Now that the holidays have passed, credit card companies are putting the squeeze to people, raising rates and lowering credit limits.

"People have been living off the equity in their houses and their credit cards. Now, both of those things are ending," Provencher said. "It's going to create an interesting problem."

So people are turning to the courts, but not to help them keep their homes. They're hoping the courts can protect them from the other land mines waiting for them after their house is gone.

In addition to looming credit card debts, many homeowners are realizing that after foreclosure, they may still need to deal with junior lenders or possible tax liabilities.

In many foreclosures, the lender cannot sue the homeowner if it seizes a home and loses money on the sale. That's the gamble the lender took in making a loan backed by real estate.

But more and more people are realizing that lenders can sometimes come after them for repayment of secondary loans, or the government can seek payment of taxes on certain forgiven loans, said Michael Fallon, a Santa Rosa bankruptcy attorney.

One common example is when a homeowner took some equity out of the home through a line of credit. Such loans are commonly secured by a second deed of trust on the home, putting the lender second in line behind the first.

If a foreclosure sale initiated by the senior lender does not generate enough money to pay the second lender, the second lender gets nothing. That lender, known as a sold-out junior, can try to hold a homeowner liable for repayment of the debt well after the home is gone, Fallon said.

Alternatively, the lender can inform the government that the loan is forgiven and the homeowner has received the amount of the loan as "income," forcing the homeowner to pay taxes on the amount.

"People are having to deal with not only the loss of their home, but the possibility of the second deed of trust holder on the property bringing an action against them to recover on the note," Fallon said.

In Sonoma County, where home prices tripled in a decade, equity lines are commonplace, often reaching tens and even hundreds of thousands of dollars.

Fear of being pursued by such lenders or the government is driving an increasing number of people to seek protection in U.S. Bankruptcy Court.

Last year, 887 Sonoma County residents and businesses sought bankruptcy protection, up from 461 cases in 2006.

Much of the increase has nothing to do with the slowing economy or housing slump. Instead, it reflects a change in the law that led to an unusually low number of bankruptcies in 2006.

From 2000 to 2004, about 1,300 people and companies filed bankruptcy each year in Sonoma County. But that number jumped to nearly 2,100 in 2005 -- a 56 percent increase -- as people raced to beat an October 2005 deadline before stricter laws took effect. As a result, the pipeline of people headed for bankruptcy in 2006 was temporarily emptied.

That pipeline is now filling up again. Although bankruptcies remained well below average in 2007, filings are increasing with every passing month.

That tells many attorneys that things are getting worse.

Paul Jamond, a Santa Rosa bankruptcy attorney, said he, too, believes this year will prove to be a massive one for bankruptcies in the county because "people are beaten."

"It's like a tsunami," Jamond said. "The water recedes from the shore. Oh, well, that's nice. Well, what's coming?"

You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com.