Bankruptcy rates rising

<p>Daniel De Guia knows just how painful financial implosion can be: He's losing his home.</p><p>And he didn't even declare bankruptcy -- his landlord did. But he has been ordered to move, to go find a new home.</p><p>"We don't even know who technically owns the house now," De Guia said. "It went up for auction in December."</p><p>Bankruptcies are ripping through the Sonoma County economy, impacting more than just the insolvent who seek protection from their creditors in a federal bankruptcy courtroom in downtown Santa Rosa.</p><p>The upheaval has thrown everyone from retailers to carpenters to Joe Six-Pack into bankruptcy.</p><p>The number of bankruptcy filings soared 77 percent in Sonoma County in 2008, and the situation is expected to get even worse this year.</p><p>When people can't pay their bills, it has a domino effect that pushes more people and businesses into bankruptcy, said Robert Eyler, director of the Center for Regional Economic Analysis at Sonoma State University.</p><p>Major retailers such as Mervyns, Circuit City and Gottschalks have filed bankruptcy.</p><p>As people and businesses search for help, bankruptcy attorneys have become swamped.</p><p>"I'm busier than I've ever been," said Michael Fallon, a bankruptcy attorney in Santa Rosa for 29 years. "And I think it is going to get much, much busier."</p><p>Some people are crushed by mounting credit card debt, others fall behind when their mortgage increases due to a rising interest rate, and others are swamped by unexpected medical bills.</p><p>Last year, 1,475 residents and 75 businesses declared bankruptcy in Sonoma County -- about 20 percent higher than the average for 2000 to 2004.</p><p>And so far this year, bankruptcy filings have only increased -- jumping a whopping 48 percent in January, compared to a year ago.</p><p>"I don't see any end in sight," said Judge Alan Jaroslovsky, who presides over the U.S. Bankruptcy Court in Santa Rosa. "I've never seen anything last this long that still appears to be going strong."</p><p>The majority of cases Jaroslovsky sees are people losing their homes to foreclosure -- by filing bankruptcy they can potentially wash away credit card debt and other bills. The trend began gaining steam a year ago, and has only increased since.</p><p>"Sooner or later you'd think they are going to run out of houses to foreclose," Jaroslovsky said.</p><p>Unlike the wave of foreclosures he witnessed from his bench in the early 1990s, homeowners are not even showing up to court to fight for their homes now.</p><p>"This time they just don't care. They're walking away from their homes," he said.</p><p>In large part, that trend is fueled by the fact people are upside down on their homes -- meaning they owe more than the home is worth. To many people, trying to keep a home that is upside down would be like going to court to prove you owe someone money.</p><p>But for those who are facing bankruptcy -- and the potential loss of their home -- attorneys point out homeowners might want to fight to retain their property even if they are upside down.</p><p>In particular, if someone's primary mortgage is greater than the value of their home, they can have the court dismiss their second mortgage by declaring Chapter 13 bankruptcy. In other words, they would not have to pay back the second loan -- whether it was secured by the property or not.</p><p>"There is some relief to be had out there," Jaroslovsky said.</p><p>Congress is considering a proposal to allow homeowners wipe out even more debt in bankruptcy court. The measure would let bankruptcy judges such as Jaroslovsky lower the payments on the primary mortgage of a debtor's main residence. Right now he can only do that for second residences, such as vacation homes.</p><p>"That is the hot proposal right now," Jaroslovsky said. "It would certainly give people another option than just walking away."</p><p>But he wonders if the law will come too late.</p><p>"As far as Sonoma County is concerned, it might be locking the barn doors after all the animals have run off," Jaroslovsky said.</p><p>Still, attorneys such as Fallon are hoping it does pass.</p><p>"It will keep people from losing their homes," he said.</p><p>And if fewer homes move into foreclosure, the real estate market might finally pull out of its devastating decline. Economists say a stable real estate market is essential to the economy's recovery, which benefits everyone.</p><p>De Guia and his wife were given a 60-day notice to vacate their home by the new homeowner's attorney. They must be out by the end of this month. It has placed an emotional burden on the couple, who work full-time while raising their two children.</p><p>"We always paid our rent on time. We weren't the ones filing bankruptcy," De Guia said. "It's been a crazy ordeal."</p><p>Even when the waves of bankruptcies and foreclosures subside, the current financial collapse will have a lasting effect, Eyler said, as people will live under the cloud of their bankruptcies.</p><p>"Their credit will be hurt," he said. "They'll have less access to it, and that hurts spending."</p><p>While there seems little doubt that too many people abused easy credit this decade, prudent use of the credit markets is beneficial to the economy, Eyler said.</p><p>"That will no longer be available to a lot of people," he said.</p><p>You can reach Staff Writer Nathan Halverson at 521-5494 or nathan.halverson@pressdemocrat.com. Check out his blog at DailyGeek.Pressdemocrat.com.</p>